Private ruling: Interest income
Date of advice: 2 September 2016
Published: October 2016
Ruling period: Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the interest income earned on funds belonging to entity A that are invested in your name included in your assessable income? | A1: No.

Relevant facts and circumstances: You will transfer funds belonging to entity A to yourself and invest them in your own name. You consider that the funds belong to entity A and you are investing them on their behalf. Your reason for doing this is that you are able to obtain a higher rate of return on the invested funds than entity A can obtain if the funds were invested in their name. You will transfer all of the funds and interest earned back to entity A when the funds are needed by entity A, less any nominal fees and charges incurred by you for investing the funds on their behalf. Entity A will include the interest income earned on the funds in their assessable income.

Relevant legislative provisions: Income Tax Assessment Act 1936 Division 7A | Income Tax Assessment Act 1997 section 6-5

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include interest income. Interest income is assessable to the entities which are beneficially entitled to the income. That entitlement depends on the beneficial ownership of the money on which the interest income is derived. The general presumption is that the beneficial ownership lies with the entities named on the account; however, this presumption may be rebutted with evidence to the contrary. Evidence relevant in determining beneficial entitlement includes information such as who contributed to the account and who used the money and the accrued interest as their own property. Evidence might also be provided that the account holder holds money in the account on trust for other entities, for example, dependants or superannuation funds. In your case, you will invest funds belonging to entity A in your own name so that a higher rate of return is obtained on the invested funds. Entity A will have the benefit of any use of the funds and the interest derived on those funds. Entity A will include the interest income in their assessable income. Although the funds will be held in accounts in your name, you are not the beneficial owner of the funds. In effect you are holding the funds in trust for entity A and you do not have any beneficial entitlement to the interest earned on those funds. As such, the interest income is not included in your assessable income under section 6-5 of the ITAA 1997. Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) treats certain amounts paid by private companies to a shareholder or shareholder's associate as dividends. In your case, entity A is not paying you any amounts; you are simply holding funds in trust for entity A. Therefore, the transfer of entity A's funds to you so that you can invest them on their behalf will not be a dividend for the purposes of Division 7A of the ITAA 1936.