Private ruling: Offset account
Published: August 2012
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is notional interest from an offset account that is offset against interest charged on your home loan assessable income? | A1: No.

Relevant facts and circumstances: You have a mortgage on your private residence. You have an offset account set up. The notional interest from the offset account is offset against the interest charged on your home loan. Interest is not credited to your offset account.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5, and | Income Tax Assessment Act 1997 section 6-10.

Reasons for decision: Summary: Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 provides that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources during the income year. Taxation Ruling TR 93/6 deals with arrangements which are used to reduce the interest payable on a customer's loan account. These are commonly referred to as interest offset arrangements. These arrangements are generally structured so that no interest is derived by the customer and therefore the customer is not liable to pay income tax in respect of the benefit arising from the account. Paragraph 6 of TR 93/6 outlines acceptable arrangements involving dual accounts. 6. The customer operates two accounts - a loan account and a deposit account. To be acceptable, it is essential that there be no entitlement, either in law or in equity, to receive interest payments or payments in the nature of interest on the amounts credited to the deposit account. The only benefit arising in the deposit account should be the right of the customer to ensure that the interest payable on the loan account is reduced in the way described in paragraph 7. 7. The reduction in the loan account interest referred to in paragraph 6 should be achieved by offsetting the balances of the two accounts. That is, the interest payable on the loan account should be calculated by dividing the outstanding loan principal into two components. A reduced rate of interest (often the lending rate less the ordinary deposit account rate) is charged on an amount equal to the balance of the deposit account. The usual lending rate of interest on loans of this type is charged on the remainder of the loan principal. In your case, you have a home loan on your private residence. You hold an offset account and the notional interest from this account is offset against interest charged on your home loan. Interest is not credited to your offset account. Your arrangement is considered comparable to the dual account arrangement outlined in TR 93/6. As you do no derive any interest, you are not liable to pay income tax in respect of the benefit arising from the account.

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