ATO Interpretative Decision
ATO ID 2002/833
Income Tax
Interest on Rental Bonds - agents as trusteeFOI status: may be released
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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 interest earned on term deposits established by the taxpayer for the purposes of section 42 of the Leases (Commercial and Retail) Act 2001 (ACT), assessable under section 99A of the Income Tax Assessment Act 1936 ('ITAA 1936')?
Decision
No. Interest earned on term deposits established by the taxpayer for the purposes of section 42 of the Leases (Commercial and Retail) Act is not assessable under section 99A of the ITAA 1936 but is assessable to the tenants?
Facts
The taxpayer acts for landlords in leasing out commercial properties in the Australian Capital Territory (ACT).
In this role they receive rental bonds on behalf of their clients.
The taxpayer places the rental bonds received into an interest bearing account.
The term deposit is in the taxpayer's own name on behalf of the tenant.
Interest is earned on the term deposit.
Reasons for Decision
The Leases (Commercial and Retail) Act covers the rights and responsibilities of landlords and tenants in the ACT.
Section 42 of the Leases (Commercial and Retail) Act states:
'If a lessor requires the tenant to pay a bond -
Section 43 of the Leases (Commercial and Retail) Act refers to situations where rent has been unpaid or where repairs are necessary due to the acts of the tenant.
The taxpayer acts as agent of the lessor with regard to the receipt of the bond. The effect of these provisions is that a trust exists, in relation to the bond, with the taxpayer being the trustee and the tenant the beneficiary.
Division 6 of the ITAA 1936 determines the assessability of income earned by a trust. If the tenant is presently entitled to the income then section 97 of the ITAA 1936 will apply to assess the income to them.
Alternatively, if no one is presently entitled, the taxpayer as trustee will be assessable under section 99A of the ITAA 1936.
Present entitlement requires a vested and indefeasible interest in the income. Under section 42 of the Leases (Commercial and Retail) Act, the interest earned under the term deposit accrues to the tenant. The owner, or any agent on their behalf, cannot appropriate the interest unless they are owed money by the tenant for rent or repairs under section 43 of the Leases (Commercial and Retail) Act.
The tenant therefore has a vested and indefeasible interest in the income and is presently entitled to that interest income.
As such, the interest earned will be assessable to the tenant under section 97 of the ITAA 1936. Accordingly, the interest will not be assessable to the taxpayer under section 99A of the ITAA 1936.
Date of decision: 6 August 2002Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
section 97
section 99A
section 42
section 43
Keywords
Present entitlement
Rental Property
Trusts
Date reviewed: 27 June 2017
ISSN: 1445-2782