Private ruling: assessable income
Published: February 2012
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Is the interest earned by you on monies loaned to an entity assessable income? | A1: Yes

Relevant facts and circumstances: You borrowed money from a third party and on-lent the proceeds to another entity. The entity invested the funds and derived assessable income. The agreement between you and the entity states you will receive a rate of interest on your loan to it, equivalent to the rate that you pay to the bank which lent you the money. The entity subsequently credited you with the interest owed but you allowed the entity to reinvest this money on your behalf. In previous years you have included this credited interest as assessable income in your tax return and claimed a deduction for the interest incurred on the loan to the financial institution.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Interest income is regarded as ordinary income and therefore assessable under subsection 6-5(2) of the ITAA 1997. Subsection 6-5(4) of the ITAA 1997 provides that in working out whether you have derived an amount of ordinary income and if so, when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. Taxation Ruling TR 98/1 states that the general principle is that interest is only derived, or arises, when it is received or credited. Interest reinvested, accumulated, capitalised or otherwise dealt with on your behalf or as you direct is said to be constructively received and therefore assessable. In your case the loan provided to the entity derives interest income equivalent to the interest you incurred in acquiring the funds. Interest income derived from on-lending to the entity is credited to you and/or reinvested on your behalf; therefore this interest will form part of your assessable income.

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