1011839584389 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of private ruling

Authorisation Number: 1011839584389

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Ruling

Assessability of interest income held in trust

Question 1

Is the interest you earn on an online account, that you have in your own name for funds transferred to you from the company, included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is the amount you pay to the company, that is equal to the amount of interest you earn on the online account on funds transferred to you from the company, a deduction under section 8-1 of the ITAA 1997?

Answer

Yes

Question 3

Are the funds transferred to you from the company, that you invest in the online account, a dividend for the purposes of section 109D of the Income Tax Assessment Act 1997 (ITAA 1936)?

Answer

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a director and shareholder of a company.

You will receive funds from the company.

You will invest the funds in your own name in an online account.

The interest rate paid in respect of an account in your name is higher than the interest rate that the company could earn if it invested the funds in its name in the online account.

You will repay the borrowed funds to the company. You will also pay to the company an amount equal to the interest that you have earned from investing the money in your own name.

You will pay the amounts prior to the due date for the company to lodge its income tax return for the 2010-11 income tax year. You do not intend to redraw the funds at or about that time.

Relevant legislative provisions

Section 6-5 of the Income Tax Assessment Act 1997

Section 8-1 of the Income Tax Assessment Act 1997

Section 109D of the Income Tax Assessment Act 1936

Paragraph 109D(1)(b) of the Income Tax Assessment Act 1936

Section 109R of the Income Tax Assessment Act 1936

Reasons for decision

Summary

The interest you earn on your online account is assessable as income.

The amount of interest you pay to the company is allowed as a deduction.

The loan from the company to you is not a dividend for the purposes of Division 7A.

Detailed reasoning

An Australian resident taxpayer includes as assessable income, income derived directly or indirectly from all sources, whether in or out of Australia, during the income year (section 6-5 of the ITAA 1997). The term income is not defined so it takes its ordinary meaning. The ordinary meaning of income includes interest derived from placing funds on deposit.

A taxpayer can deduct from their assessable income any loss or outgoing to the extent that it is incurred in gaining or producing their assessable income (section 8-1 of the ITAA 1997). This means an interest expense can only be deducted to the extent to which the taxpayer has used the borrowed money to gain or produce assessable income of the taxpayer. An interest expense will not be deductible to the extent that the taxpayer has used the borrowed money for the purpose of benefiting persons other than the taxpayer.

Application to your circumstances

Interest amounts

You will receive funds from a related company and invest the funds in your own name in an online account. The interest rate paid in respect of an account in your name will be higher than the interest rate that the company could earn if it invested the funds in its own name in an online account

In the present case, the ordinary meaning of income includes interest derived from placing funds on deposit in the online account. Therefore the whole of the interest amount that you earn from investing in the online account in your own name is assessable as income.

Before the due date for lodgement of the company's tax return, you will repay the borrowed funds to the company and you will also pay to the company an amount equal to the interest that you have earned less any expenses you have incurred in investing the funds in the personal account.

In borrowing the funds you had a dual purpose. Firstly, to invest the funds so that the company would receive more interest than it would from investing funds in its own name in an online account. Secondly, to earn the maximum amount of interest you could from investing the funds in your own name in an online account. As there is a dual purpose in borrowing the funds, any interest expense may need to be apportioned to limit the amount of the deduction you may claim for the interest you pay to the company, to an amount equal to the interest you earn.

In the present case, the amount you pay to the company will be the amount of interest you earn from investing in the online account in your own name. Therefore the amount you pay to the company is allowed as a deduction.

Division 7A

Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) applies to private companies that make tax-free distributions of profits to shareholders or their associates. In particular, loans and other payments or credits to shareholders or their associates may be treated as assessable dividends to the extent that the private company has a distributable surplus (section 109D of ITAA 1936).

However a loan made by a private company that was made during an income tax year and that was repaid prior to the due date for lodging the company's income tax return for that tax year, is not a dividend for the purposes of Division 7A (paragraph 109D(1)(b) of ITAA 1936).

Despite the exception provided for by paragraph 109D(1)(b) of ITAA 1936, a loan will not be considered as having been repaid if, when the loan is repaid, a similar amount was redrawn or it was intended that a similar amount would be redraw (section 109R of the ITAA 1936).

In the present case, you will repay the funds prior to the due date for lodging the company's income tax return for the 2010-11 income tax year. You do not intend to redraw the funds at or about that time. Therefore the loan will not be a dividend for the purposes of section 109D of the ITAA 1936.

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