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This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012418129690

Ruling

Subject: Assessability of bank interest

Questions and Answers:

1. Are the payments from the investment which you have declared in your income tax returns for the 2010-11 and 2011-12 income years assessable income?

2. Did you make a capital loss in the 2011-12 income year from your investment?

This ruling applies for the following period:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You entered into an investment in the form of a loan.

You made a loan to an individual X, one of the directors of Company Y (the company) believing the loan was to the company.

You received a letter of understanding from X stating that the loan was to X and you would receive the capital invested plus interest with the capital being repaid to you within 7 days and the remainder within a month.

You deposited the loan amount in the joint account of Individual X and their spouse as directed.

You received regular payments into your bank account until date A.

X passed away.

Since the death of X, the company has maintained that the loan was to X and not to the company.

The executor of the Estate of X advised you that X did not have sufficient funds to pay creditors including yourself. The letter asked you to forgive the debt owing to you.

You did not forgive the debt

The company is still operating.

You have taken some steps to recover your debt and are still trying to retrieve the debt from the company.

You declared income from your investment of $D in your 2010-11 tax return and $E in your 2011-12 return as part of your assessable income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 102-5.

Income Tax Assessment Act 1997 Section 102-20.

Income Tax Assessment Act 1997 Section 104-25.

Income Tax Assessment Act 1997 Section 108-5.

Reasons for decision

Assessability of payments from your investment

The assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Interest income is considered to be ordinary income. A taxpayer is taken to have received an amount of ordinary income when the amount is applied or dealt with in any way on the taxpayer's behalf or as directed by the taxpayer.

In your case you entered into an investment in which you loaned an amount on the understanding that you would be paid regular amounts of interest as well as the repayment of your capital, the capital payments being paid in advance.

You received regular payments into your bank account until a certain date.

You declared the payments you received in your 2010-11 and 2011-12 tax returns as part of your assessable income. As these payments were a return of part of your capital they do not constitute assessable income.

Capital loss

We shall now consider if you can claim a capital loss for your investment. Under the capital gains tax (CGT) provisions you can only claim a capital loss against a capital gain such as the sale of shares or an investment property.

A CGT asset is any kind of property, or a legal or equitable right that is not property. A debt or a right to repayment is a CGT asset. In your case the debt owing to you is a CGT asset.

A capital gain or loss is only made if a CGT event happens to a CGT asset that you own. There are several CGT events which can occur depending on the circumstances.

The most relevant CGT event for consideration in your case is CGT event C2. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

We need to determine if CGT event C2 (cancellation, surrender or similar event) has occurred with regard to your investment.

In the situation where a loan is made to an individual, the relevant date for CGT event C2 occurs when the person has no legal right to recover the money owed to them by the individual. Alternatively, their debt may be extinguished by forgiveness under a Deed of release such that the owner of the debt is legally barred from collecting the debt.

In the case where a loan is made to a company a capital loss may arise when the company becomes deregistered and/or the administrator has declared that the person is no longer a creditor.

You consider you made a loan to a company and not an individual. The company is still operating. Whilst we acknowledge you have taken steps to recover your capital, you are still taking action to retrieve your funds. CGT event C2 has not yet taken place and thus you cannot claim a capital loss in the 2011-12 income year.

Should a CGT event take place in the future that results in a capital loss, you will be able to apply that loss to reduce any capital gains in the year the loss is made. If this happens and you have a net capital loss in the year concerned, you can carry forward that loss to be applied to future years' capital gains, but you cannot deduct a net capital loss from income.

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