ATO ID 2010/201: Assessability of interest income from a New Zealand income equalisation account
Date of decision: 21 October 2010
Year of income: Year ended 30 June 2010
Business line: Individuals & Small Business

Issue
When is interest income on a deposit in a New Zealand income equalisation account assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Interest income on a deposit in a New Zealand income equalisation account is assessable under subsection 6-5(2) of the ITAA 1997 in the income year in which it is credited to the taxpayer's New Zealand income equalisation account.

Facts
The taxpayer is a resident of Australia. The taxpayer is a primary producer who carries on a forestry business in New Zealand. The taxpayer is a participant in a New Zealand income equalisation scheme (NZ IES). The NZ IES is a form of forward tax averaging in New Zealand, designed to enable primary producers to even out the effects of fluctuating incomes on their tax liabilities over a period of five years. Under the NZ IES, a taxpayer who derives income from forestry may deposit amounts from that income into a New Zealand income equalisation account, and may apply to withdraw amounts from the account. The taxpayer derived income from the forestry business in New Zealand in a previous income year, and deposited a portion of that income into an income equalisation account. On 31 March of the current income year, interest accrues in the taxpayer's income equalisation account. The taxpayer does not withdraw the interest from their account in the current income year. For New Zealand tax purposes, the interest is not assessable income in the current year. It will be assessable income in a future income year when it is withdrawn from the account.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources in or out of Australia during the income year. Interest is ordinary income (see for example ATO ID 2001/610). In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Schedule 4 to the Agreements Act contains the tax treaty between Australia and New Zealand (New Zealand Convention). The New Zealand Convention operates to avoid the double taxation of income received by Australian and New Zealand residents. Article 11(1) of the New Zealand Convention provides that interest arising in New Zealand and beneficially owned by a resident of Australia may be taxed in Australia. As the New Zealand Convention does not disturb Australia's right to tax the interest, the taxpayer's assessable income will include the interest income in the year in which it is derived. Paragraph 26 of Taxation Ruling TR 98/1 Income Tax : determination of income ; receipts versus earnings , explains that many taxpayers derive income in the income year in which it is received, and that others derive income in the income year it is earned. Paragraph 47 of TR 98/1 explains that interest is usually derived when it is received or credited. (The ruling provides some circumstances where this is not the case but those circumstances are not relevant to the present case). Subsection 6-5(4) of the ITAA 1997 provides that in working out whether an amount of ordinary income has been derived by a person, and (if so) when, the person is taken to have received the amount as soon as it is applied or dealt with in any way on their behalf or as they direct. In the present case, the taxpayer's New Zealand income equalisation account is credited with interest on 31 March of the current income year. When the interest is credited to the account, it is considered to have been applied on the taxpayer's behalf because the account is held for their benefit. The taxpayer received the interest, and therefore has derived the interest, at the time that it is credited to their account. Australia's farm management deposit scheme in Division 393 of the ITAA 1997 does not apply to treat the interest as if it is derived when it is withdrawn, and there are no provisions in Australia's income tax legislation which treat the interest as if it was derived at any time other than the time when it is credited to the taxpayer's New Zealand income equalisation account. Accordingly, for the purpose of subsection 6-5(2) of the ITAA 1997, the interest income is derived at the time that it is credited to the taxpayer's New Zealand income equalisation account, and the interest is included in assessable income under subsection 6-5(2) of the ITAA 1997 in the income year in which it is derived.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2) subsection 6-5(4) Division 393
Related public rulings and determinations: Taxation Ruling TR 98/1
Related ATO interpretative decisions: ATO ID 2001/610 | ATO ID 2010/200 | ATO ID 2010/202 | ATO ID 2010/203
Subject references: Foreign Income Interest income Income tax Income equalisation deposits scheme