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Edited version of your private ruling
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Ruling
Subject: Investment income
Question
Are the interest amounts you reinvested assessable income?
Answer
Yes
This ruling applies for the following period
Year ended 30 June 2012
The scheme commences on
1 July 2011
Relevant facts and circumstances
You invested an amount into a monthly income fund .
You chose the option of having your monthly distributions reinvested back into the fund.
Your investment earned interest for the 2011-12 financial year. You have declared this amount in your income tax return.
You were notified of the appointment of receivers and managers to the responsible entity of the fund.
The circular also advised that applications for units in the fund had been closed and redemptions in the fund were suspended.
You were notified that distributions would be paid to unit holders, however the reinvestment of distributions would be suspended. All distributions that would have normally been reinvested would now be paid in cash either by direct deposit into a nominated bank account or by cheque.
You have received distributions into your nominated bank account and you will declare any interest income earned in your income tax return.
You were notified by the receivers and managers that the fund would be terminated, and that the net proceeds from the realisation of the assets of the fund will be paid to unit holders on a pro rata basis according to the number of units which they hold at termination.
They also advised that income distributions may be made at the same time as payments arising from the realisation of the funds assets and that investors would receive an annual tax statement in respect of their income distributions at the end of the financial year.
You were notified that it was expected that you would be paid an interim distribution per unit.
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 your monthly distributions rather than have the distributions paid by direct deposit into a nominated bank account. As such, although you did not physically receive the interest, you derived income under section 6-5(4) of the ITAA 1997 because the distribution was applied or dealt with on your behalf by your payment instructions.
As a result, the interest was constructively received by you and is therefore correctly included in your assessable income for the 2011-12 financial year. The fact that the fund is now in liquidation and that the net proceeds from the realisation of the funds assets will be paid to unit holders on a pro rata basis does not alter the fact that the interest has been derived and is assessable.
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