Edited version of your written advice

Authorisation Number: 1012753085215

Ruling

Subject: Interest

Question 1

Is your share of the interest income assessable income?

Answer

Yes.

Question 2

Are you entitled to a deduction for the calculated amount of interest income foregone following the withdrawal of money from your offset account?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 September 2010

Relevant facts

You signed a contract to buy an off-plan property and paid a holding deposit.

You then withdrew money from your main resident home loan offset account to pay the 10% deposit for the property.

Both the home loan and the offset account are in your name only.

The property was settled in 2013.

Approximately one month later, the property was put on the market as a rental property.

In 2014 you received your share of the interest income for the deposits paid. The interest was shared equally with you and the developer as per the sales agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Assessable income

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 during the income year. Ordinary income has generally been held to include interest income.

Interest income from bank accounts is assessable to the person who derives the income and is beneficially entitled to the income. The person/s in whose name the investment is taken out will generally be considered to be beneficially entitled to the income from the bank account unless there is evidence to the contrary.

Taxation Determination TD 92/106 Income tax: who should be assessed to interest earned on a joint bank account? states that interest income on a joint bank account is assessed to the persons who are beneficially entitled to the income. The entitlement depends on the beneficial ownership of the money in the account. The general presumption is that holders of accounts in joint names have joint beneficial ownership of the moneys in equal shares. This presumption is rebuttable by evidence to the contrary.

Evidence relevant in determining an individual's beneficial entitlement includes information as to who contributed to the account, in what proportions the contributions were made, who drew on the account, who used the money and who the interest is distributed to.

In your case, as per the sales agreement you are entitled to your share of the interest income relating to the deposit money. As you are not entitled to the full amount of interest income derived from the deposit moneys, your assessable income does not include the full amount. Your assessable income is only your share of the interest income.

Interest expenses

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

You advise that as the total deposit was withdrawn from the offset account which would have generated interest income, you wish to claim a deduction equal to the calculated interest which would have been generated if the money remained in the offset account.

Taxation Ruling TR 93/6 Income tax and fringe benefits tax: loan account offset arrangements outlines the Commissioner's view on loan account offset arrangements which are used to reduce the interest payable on a taxpayer's loan account. TR 93/6 provides that an acceptable loan account offset arrangement with dual accounts operates as follows:

• There are two accounts - a loan account and a deposit account. It is accepted that where the deposit account is a sub-account, it will be treated as a separate account.

• No interest is received on the deposit account.

• The reduction of the loan account interest should be achieved by offsetting the balances of the two accounts.

As highlighted in paragraph 6 of TR 93/6, to be an acceptable offset arrangement for tax purposes, it is essential that there be no entitlement, either in law or in equity, to receive interest payment or payments in the nature of interest on the amounts credited to the deposit account. The only benefit arising in the deposit account should be the right to ensure that the interest payable on the loan account is reduced.

A taxpayer with an acceptable loan account offset arrangement with dual accounts is entitled to claim a deduction for the reduced amount of interest incurred on the loan account whilst the loan is used wholly for income producing purposes.

In your case, the original loan relates to your home. As the original loan is not used for income producing purposes, the associated interest expense is not an allowable deduction and is private in nature.

Depositing funds into the deposit account will decrease the interest payable on the loan account but will not decrease the balance of the loan account.

Withdrawing funds from the deposit account will increase the interest payable on the loan account but will not increase the balance of the loan account.

In your case, as you have an offset account as well as your loan account, the loan account will operate in conjunction with a deposit account. Any credit balance of your deposit account will reduce the interest payable on your loan account.

Consequently when you withdrew funds for the deposit from your offset account, the interest payable on your loan increased. The fact that the funds were used for the deposit for your rental property does not convert the interest payable on your original home loan into a deductible expense.

In withdrawing money from your offset account, you have not actually incurred any interest expense.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape.

The guidelines developed by the courts that help to determine if an expense has been incurred include:

• there must be a presently existing liability to pay a pecuniary sum,

• presently existing liability is determined on the circumstances of the case,

• an expense is incurred when actually paid if there was no presently existing liability.

Taxation Ruling TR 94/26 Income tax: subsection 51(1) - meaning of incurred - implications of the High Court decision in Coles Myer Finance also provides the Tax Offices views on the meaning of incurred and states at paragraph 6 that: 

Whether there is a presently existing pecuniary liability is a question which must be determined in light of the particular facts of each case, and especially by reference to the terms of the contract or arrangement under which the liability is said to arise.

In your case, while it is accepted that the amount in your offset account is reduced and the interest expense on your home loan is increased, a deduction is not available for the notional expense relating to the withdrawn deposit amounts. As your offset account was in credit and you did not actually pay any associated interest, you have not actually incurred an interest expense. You do not actually have a liability in relation to the funds withdrawn for the deposits. Therefore, no deduction is allowed under section 8-1 of the ITAA 1997.

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