Private ruling: Interest income
Published: October 2011
Ruling period: Year ended 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2010

Ruling: Q1: Is interest from a private loan derived but not received assessable income? | A1: Yes | Q2: Are the legal costs of setting up a mortgage deductible? | A2: No

Relevant facts and circumstances: You have provided an interest only loan with other family members to a relative for the purposes of paying out another loan. The loan is secured by a private mortgage. You have provided a copy of the mortgage document and certificate of title. You made arrangements to have your relative repay the loan. Interest is to be calculated and payable monthly for the term of the loan. Although interest is being charged on the loan, no interest payments will be received by you. There will be no formal statement of such for accrual of deferred compound interest. You incurred legal costs in setting up the mortgage.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Your portion of the interest derived from a loan to a relative although not received has been constructively received and therefore assessable in the year that it is derived. The legal costs you have incurred in having mortgage documents prepared are not deductible as the costs are capital expenditure. | Detailed Reasoning - Detailed reasoning: Section 6-5 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 section 6-5 of the ITAA 1997. Income is assessable under section 6-5 of the ITAA 1997 , when the person is taken to have derived it. The term 'derived' is explained in the subsection to mean when it is received or applied or dealt with in any way at the person's direction. Taxation Ruling TR 98/1 sets out the Commissioner's guidelines on the cash or accruals methods for the treatment of income. In the case of interest or investment income, the general principle is that it is only derived, or arises, when it is received or credited (paragraph 47). 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, you and your other family members have provided a loan to a relative to resolve a private matter. You have set up a mortgage for this purpose to secure this loan. The arrangement under the mortgage is for interest to be calculated and payable monthly for the term of the loan. The loan has been provided with repayments of interest only but no payments will be received by you or other family members. As a result, the interest is constructively received by you and is therefore to be included in your assessable income in the year it is derived. | Detailed Reasoning - Mortgage Costs: Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236: (1949) 8 ATD 431 the High Court stated that: ' For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" means in the course of producing such income.' The expenditure must therefore be related to the production of assessable income and not be incurred at a point too soon to be deductible ( FC of T v. Maddalena (1971) 2 ATR 541; 71 ATC 4161). In your case, the costs you have incurred in setting up the mortgage are not an allowable deduction under section 8-1 of the ITAA 1997 as it is capital expenditure and not incurred in the course of gaining or producing the assessable income.

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