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Ruling

Subject: Interest income

Question:

Are payments you receive in relation to a matrimonial financial settlement and described as 'penalty interest' assessable income?

Answer:

Yes.

This ruling applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

Under a Family Court Order you were to receive a sum of money as part of a matrimonial settlement.

The final instalment was due on XX/XX/XXXX,

The original Family Court Orders were made by consent in the relevant financial year, and included that should your former spouse default in making any payments, interest was payable on money outstanding.

When a payment was not received by the due date, you became aware of a typographical error in the original orders which appeared to delay the due date of the payment.

You did not become aware of the error until after the due date for payment. Once you became aware of the error, you sought an order for variation of the original orders to correct the error.

Your application was dismissed and you then lodged an appeal.

You appeal was allowed in the subsequent financial year and the error was corrected confirming the original due date.

In addition to this, the interest rate for non-payment was amended to the rate prescribed in r 17.03 of the Family Law Rules 2004, payable from the original due date of the payment.

The payment was received in the subsequent financial year.

The interest payable is in excess of $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 6-5

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Interest income is normally regarded as ordinary income for the purposes of section 6-5 of the ITAA 1997.

The assessability of interest payments made pursuant to a court order was considered in Whitaker v. Federal Commissioner of Taxation (1998) 153 ALR 334; 98 ATC 4285 (Whitaker' case)

In Whittaker's case, a taxpayer had been awarded damages for personal injury and this included an amount for pre-judgement interest which related to the period from when the cause of action arose to when the judgement took effect. Because of subsequent appeals, payment was delayed and, eventually, an amount of post-judgment interest was also ordered. The Full Federal court held that the pre-judgement interest constituted a capital receipt and that the post-judgment interest was to be treated as ordinary income.

The court decided that post-judgment interest was assessable as ordinary income because it had no connection with the cause of action and was payable solely because of the delay between the entry of judgment and payment.

It is concerned with the consequences of a delay in compliance with the orders of the court and gives a remedy of making the judgment debt bear interest. The interest is in no sense a means of calculating an appropriate lump sum, but is payable in its own character as interest (per Burchett J)

In your case, the original settlement order was made in the relevant financial year. Under those orders, an amount of interest was payable on any monies not paid by the due date. The interest payable is in excess of $X.

This amount has no connection with the matrimonial settlement and was payable solely because there was a delay in payment as required under the settlement, and maintains the character of interest.

The subsequent actions to vary the original order and the resulting appeal do not alter the character of the payment as post judgment interest. The successful appeal simply amended the original orders to reflect the original agreement and provided a fairer method of calculating the interest payable.

Therefore, the interest received under your amended matrimonial financial settlement is assessable under section 6-5 of the ITAA 1997 as ordinary income.

Further issues for you to consider

As the interest is payable on amounts payable to you under the matrimonial financial settlement between you and your former spouse, you are assessable on the full amount. This is the case even though, under separate parts of the agreement, portions of the final settlement payment were to be placed in trust for other members of your family.

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