Edited version of private ruling

Authorisation Number: 1011762593890

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Interest- income and deduction

Question 1

Is the interest paid to the bank deductible by you using the cash basis method as and when paid to the bank (i.e. monthly when it is debited to your loan account)?

Answer

Yes

Question 2

Is the interest income payable to you by the trust only assessable using the cash basis method when actually received by you from the trust (i.e. when the cash is actually paid by the trust)?

Answer

Yes

Relevant facts and circumstances

You are intending on establishing a trust with a corporate trustee, and you will be one of the beneficiaries.

You intend to draw on a loan (in your personal name) from a bank and lend this money to the trust at arm's length so that the trust can acquire shares in a company. The interest rate applied to the money loaned to the trust will be the same as the interest rate paid by you for the loan from the bank.

The trust acquires shares in a company but does not have a fixed or periodic revenue source, it is expecting to earn dividends from the investment in the company but the amount and timing is not known. The trust expects to sell the shares in the company at some point in the future.

You are required to pay interest on the loan from the bank (i.e. it will be debited to your loan account) on a monthly basis. Under the loan agreement between the trust and yourself interest will accrued monthly but payment will not be required until the loan is repaid or the investment in the company is realised by the trust at which point it will be required to repay the loan and any outstanding accrued interest.

Question 1

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a deduction for losses and outgoings is allowable if it is incurred in gaining or producing assessable income and it is not capital or of a private and domestic nature.

Taxation Ruling TR 97/7 discusses the meaning of incurred.

For the purposes of section 8-1 of ITAA 1997 it is sometimes not enough that a loss or outgoing has been incurred. The outgoing must also be properly referable to the year of income in which the deduction is sought refer Coles Myer Finance Pty Ltd v. FC of T 93 ATC 4214 at 4222; (1993) 25 ATR 95 at 105 (Coles Myer) (TR 97/7 (7)).

The interest paid to the bank is deductible by you as it is an outgoing incurred in generating the interest income for future. This outgoing will be deducted by the cash basis method.

Question 2

Detailed reasoning

Section 6-5 of the ITAA 1997 states your assessable income includes income according to ordinary concepts.

Generally the cash basis method of reporting income is used by most individuals. Under this method, income is returned in the year when it is actually or constructively received. Alternatively, there is the accrual method where income is derived when it is earned.

Taxation Ruling TR 98/1 paragraph 47 states that:

the general principle is that interest is only derived, or arises when it is received or credited. Exceptions to this rule include:

· Interest from a business of money lending carried on by the taxpayer;

· Interest derived by a financial institution; unless from a "non-accrual loan" ;

· Interest from the everyday provision of credit as part of business activities;

· Interest derived by taxpayers, whose other income is calculated on an accruals basis, who invest in fixed or variable interest securities cum interest ; and

· Interest from deposits made in the ordinary course of carrying on a business, where the business income is properly assessable on the earning basis, may be derived on a due and receivable basis. An example of this would be a large trading business that actively manages its funds on deposits.

The interest income from lending the loan to your trust is assessable on the cash basis. This is based on the fact that the interest income for you will only become receivable in the end of the loan agreement term (although the interest is accrued monthly). You are an individual and are currently depending on your salary income from your employer.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).