Edited version of private ruling

Authorisation Number: 1011769371769

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Ruling

Subject: Interest income

Question

Is the interest income earned on your debentures assessable in the year in which it was distributed to you?

Answer

Yes.

Relevant facts and circumstances

You hold two debentures with a company.

You have stated that debentures were being withdrawn as customers wanted to have their deposits guaranteed.

A bank was not able to provide additional funding to pay out the debentures.

As a result, the company suffered cash flow problems. The company's board froze debenture redemptions. You advised that the window of opportunity to withdraw your debenture holdings was very small.

The company was placed into receivership. Receivers were appointed.

As a debenture holder, you have received five distributions to date. You received part of the principal plus interest at the rate applicable to your debentures when they were placed into receivership.

Regarding the principal payment, you received ten cents in the dollar for the first distribution and fifteen cents in the dollar for the distributions thereafter.

You have stated that there may be another distribution.

You do not believe that the interest, which was payable to you in previous financial years should all be assessed in the financial year that they were received.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

Summary

The interest income earned on your debentures is assessable in the year in which it was distributed to you. This is because interest income is considered to be derived when it is received.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that 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.

Under subsection 6-5(4) of the ITAA 1997 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 the taxpayer directs.

Taxation Ruling TR 98/1 at paragraph 47 states the general principle is that interest is only derived, or arises, when it is received or credited.

In your case, you became entitled to interest income which was calculated on distributions arising from your two debentures in the company. Although you have stated that the interest income was due to be paid to you in prior income years, the interest was actually derived when you received it.

Therefore, the interest is assessable under section 6-5 of the ITAA 1997 in the financial year in which you received it.

We acknowledge that the distributions you received relate to prior financial years. However, as the interest income is correctly assessable in the current financial year, the Commissioner has no discretion to amend your taxable incomes in accordance with your request.