ATO Interpretative Decision
ATO ID 2002/886
Income Tax
Assessability of compound interestFOI status: may be released
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This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the compound interest derived from interest income reinvested as capital in a bank account assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The compound interest derived from interest income reinvested as capital in a bank account is assessable income pursuant to section 6-5 of the ITAA 1997.
Facts
The taxpayer has invested a sum of money in a bank account.
The taxpayer derives interest income from the investment.
The taxpayer elects to reinvest the interest income to increase the capital amount invested in the bank account.
The taxpayer derives compound interest income from the reinvestment of the interest income.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Under subsection 6-5(4) of the ITAA 1997 a taxpayer is taken to have received an amount of ordinary income when the amount is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.
The interest income is considered to be 'ordinary income' and, as such, is assessable under section 6-5 of the ITAA 1997 in the income year that it is reinvested. Although the interest income is not paid directly to the taxpayer, the taxpayer is taken to have received the interest income as soon as it is reinvested as the taxpayer has directed.
In addition, the subsequent compound interest derived from the reinvestment of the interest income as capital, retains the character of interest. Accordingly, the compound interest is also assessable under section 6-5 of the ITAA 1997.
Date of decision: 14 June 2002Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 6-5
subsection 6-5(2)
subsection 6-5(4)
Keywords
Derived
Interest income
ISSN: 1445-2782
| Date: | Version: | |
| You are here → | 14 June 2002 | Original statement |
| 25 July 2014 | Updated statement | |
| 21 April 2017 | Archived |