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Edited version of private ruling
Authorisation Number: 1011727109292
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Ruling
Subject: Dividend and interest income
Questions and answers:
1. Will interest income be assessable to you when it is received by you?
Yes
2. Will interest income be assessable to you when it is credited to you?
Yes
3. Will dividend income be assessable to you when it is paid to you?
Yes
4. Will dividend income be assessable to you when it is credited to you?
Yes
This ruling applies for the following period:
Year ended 30 June 2007
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
Year ended 30 June 2011
The scheme commenced on:
01 July 2006
The scheme that is the subject of this ruling.
Audits were conducted of years A and B.
As a result of these audits amendments were made to your returns to include omitted dividend and interest income.
This income was included in subsequent years' returns.
After receiving a letter from a bank confirming you had received this income in the subsequent years amendments were made to years A and B to reflect the original figures.
You have received income from dividends from various companies which were reported as having been received in years A and B.
This income was not received in these years.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1936 Section 6(1).
Income Tax Assessment Act 1997 Section 44(1a)
Reasons for decision
Interest
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.
Dividends
Section 6-1 of the Income Tax Assessment Act 1936 (ITAA 1936) provides the definition of a dividend and Section 44(1) ITAA 1936 defines the assessability of dividends.
The concept of entitlement is central to the notion of derivation encapsulated in the words 'dividends paid to him' in subsection 44(1). To quote Mason J in the Brookton Co-Operative Case 81 ATC at 4355; 11 ATR 889:
Section 44(1)(a) includes in the assessable income of the taxpayer "dividends paid" to it by Tunwin "out of profits derived by it from any source". "Paid" is defined by sec. 6(1) in relation to dividends so as to include dividends "credited or distributed". By virtue of sec. 44(1)(a) and the statutory definition, a dividend does not form part of the assessable income of a shareholder unless it is paid or credited, notwithstanding that the declaration of a final dividend by the company in general meeting creates a debt and an enforceable right on the part of the shareholder to the dividend. Consequently, in its application to a final dividend the extended statutory definition does nothing to disturb or qualify, as between company and shareholder, the characteristic of a dividend as a debt which is owing by the company to the shareholder. As this is the effect of the extended definition in its application to a final dividend, it would be irrational and incongruous to give it a more radical application when applied to an interim dividend. The reference to "dividends" in sec. 44(1)(a) must be read as a reference to dividends the payment of which is enforceable by the shareholder because they have been declared so as to create a debt, or to dividends which are no longer revocable because, as between company and shareholder, they have been satisfied by payment. When sec. 44(1)(a) is so read, the purpose of the extended definition becomes clear - it is to guard against the possibility, perhaps remote, that the word "paid" might be so narrowly construed that dividends credited or distributed to shareholders in circumstances where they can no longer be revoked or rescinded by the company would not constitute assessable income in the hands of shareholders.
Therefore a dividend paid to you does not become part of your assessable income until it is paid or credited to you.