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Edited version of private ruling
Authorisation Number: 1011649076361
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Ruling
Are you required to include reinvested interest as assessable income in your income tax returns?
Yes.
This ruling applies for the following periods
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on
1 July 2008
Relevant facts
You invested funds in company A.
Your investment earned interest, and instead of receiving the amount in cash you reinvested the amounts.
Company A was taken over by Company B.
The investment earned further interest, and you again reinvested the amount.
You were advised Company B had gone into liquidation, and the company has ceased trading.
Administrators have been appointed.
As a creditor, you have been informed that that it is unlikely that there will be any surplus assets/funds available for investors.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2).
Income Tax Assessment Act 1997 Subsection 6-5(4).
Reasons for decision
Subsection 6-5(2) 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 subsection 6-5(2) of the ITAA 1997.
Subsection 6-5(4) of the ITAA 1997 provides that in working out whether you have derived an amount of ordinary income and if so, when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
Taxation Ruling TR 98/1 states that the general principle is that interest is only derived, or arises, when it is received or credited.
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 chose to reinvest the interest earned by adding it to the initial investment. As such, although you did not receive the interest, you derived income under section 6-5(4) of the ITAA 1997 because you applied or dealt with it on your behalf by directing the funds to be reinvested.
As a result, the interest was constructively received by you and is therefore to be included in your assessable income.
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