Disclaimer
This edited version has been archived due to the length of time since original publication.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: 1012079167245

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: assessable income

Question

Is the interest earned by you on monies loaned to an entity assessable income?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You borrowed money from a third party and on-lent the proceeds to another entity.

The entity invested the funds and derived assessable income.

The agreement between you and the entity states you will receive a rate of interest on your loan to it, equivalent to the rate that you pay to the bank which lent you the money.

The entity subsequently credited you with the interest owed but you allowed the entity to reinvest this money on your behalf.

In previous years you have included this credited interest as assessable income in your tax return and claimed a deduction for the interest incurred on the loan to the financial institution.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

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.

Interest reinvested, accumulated, capitalised or otherwise dealt with on your behalf or as you direct is said to be constructively received and therefore assessable.

In your case the loan provided to the entity derives interest income equivalent to the interest you incurred in acquiring the funds. Interest income derived from on-lending to the entity is credited to you and/or reinvested on your behalf; therefore this interest will form part of your assessable income.