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Ruling

Subject: Interest earned on settlement amount

Question 1

Is the interest earned on the settlement amount payable under a Deed of Settlement assessable as income in the hands of the rulee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ended 30 June 2011?

Answer

No.

Question 2

Is the interest earned on the settlement amount payable under a Deed of Settlement assessable as income in the hands of the rulee under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ended 30 June 2012?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2011.

Year ended 30 June 2012.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

The Rulee commenced a Supreme Court proceeding against other entities.

The trial commenced and mediation was subsequently ordered. The parties resolved to settle the proceeding and a Deed of Settlement (The Deed) was executed.

Under the Deed, the other entities paid into fixed interest bearing deposit accounts under the name of their solicitors, the agreed settlement amount and agreed to pay the settlement amount plus any interest earned to the rulee once conditions in the Deed were met.

If the conditions were not met, the money would be returned to those entities.

Interest on the total settlement sum was earned for the period December 2010 to 24 October 2011.

The settlement amount including the interest earned whilst the amount was held in interest bearing accounts were paid to the rulee in the 2011-12 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1936, section 99

Income Tax Assessment Act 1936, section 99A

Reasons for decision

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Interest income

Receipts in the nature of a return on capital invested, such as interest, dividends and rents are income according to ordinary concepts and will be assessable unless expressly excluded or exempted. Therefore interest received is assessable as ordinary income.

If you received, or were credited with, interest from any source within Australia, for example:

· interest earned from financial institution accounts and term deposits unless you were a non-resident and have paid, or should have paid, non-resident withholding tax on that interest 

· interest the Tax Office gave you or credited you with  if you opened or operated an account for a child and the funds in that account belonged to you, or you spent or used the funds in the account as if they belonged to you, you must include any interest from the account then you must declare this in your tax return.

Interest earned on investment accounts is assessable to the person or persons who are beneficially entitled to the income (Taxation Determination TD 92/106). TD 92/106 paragraph 1 instructs that entitlement depends on the beneficial ownership of the moneys in the account and that in the absence of any evidence to the contrary it is generally presumed that the account holder is the person who has beneficial ownership of the moneys held in the account.

In Harmer & Ors v Federal Commissioner of Taxation 91 ATC 5000 money held in account by a solicitor subject to Court orders was considered to be held in trust, for taxation purposes, by the solicitor.

In Federal Commissioner of Taxation v. Northumberland Development Co Pty Ltd 31 ATR 161 the interest component of a compensation payment was held to be part of the compensation payment and not assessable as income separately.

Dwight v. FC of T 92 ATC 4192 dealt with a solicitor holding money in trust for his client United States Surgical as security for court costs. Hill J stated in his judgement:

In my opinion, the present is a case where United States Surgical had, in the relevant years of income, a vested and indefeasible interest in the income from the security account. For the reasons given in Harmer, the defendants had no such interest and indeed were not beneficiaries. But here, United States Surgical was a beneficiary, indeed the only beneficiary, and the moneys in the fund and the income to be generated from it belonged to that company, subject only to a charge or lien upon it in favour of the defendants to secure future cost orders. In the result, United States Surgical was presently entitled to the whole of the income of the security fund and, accordingly, s. 99A could have no application to assess for tax Mr Dwight. …

In your case the interest earned on the settlement amounts while they were in fixed interest bearing accounts waiting to be dispersed to you is not assessable to you for the year ended 30 June 2011, as at this time you were not the legal or beneficial owner of the money and you did not have any rights to the interest income as a beneficiary of a trust..

The money was held with the intention of it being paid to you if the conditions of the Deed were met. The other parties would authorise their solicitors to pay the settlement sum to you when the conditions were met. If the conditions were not met, the other parties would have the amounts deposited paid back to them.

You were not a beneficiary of the trust, but as in Dwight's case you had a charge or lien over the funds, as you would have standing in a court of equity if the trustee attempted to incorrectly appropriate the funds.

The solicitors were not a party to the deed and do not appear to have any powers over the money other than to hold the money in trust until instructed to pay it to you or back to the other parties.

The interest earned on the settlement amounts while they were in fixed interest bearing accounts for the year ended 30 June 2012 were also not legally or beneficially held by you and the interest was paid to you as part of a settlement amount and not as a beneficiary of a trust. Accordingly you are also not assessable on the interest for this financial year.