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Edited version of private advice
Authorisation Number: 1012643864915
Ruling
Subject: Income - interest
Question
Is interest earned from a private loan arrangement to family members assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 2012
Year ended 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
The scheme commences on
1 July 2011
Relevant facts and circumstances
You and your spouse lent a sum of money in the form of a private loan to family members.
They have purchased a property with the funds.
This transaction has been legally documented by your solicitor, and you and your spouse hold a mortgage over the property.
It has been agreed between the parties that the funds will be repaid under a principal and interest loan arrangement on a weekly basis.
The interest rate charged is comparable to a commercial/financial institution variable rate home loan at current market rates where the interest accrues daily and is charged monthly in arrears.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Reasons for decision
Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident taxpayer includes ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia during the income year
Interest income is considered ordinary income and therefore is assessable under section 6-5 of the ITAA 1997.
The arrangement is considered to be undertaken on a commercial basis and the fact that the interest is paid to you by a family member does not change the character of the receipt, it remains ordinary income.
The portion of the repayments that relates to the interest is considered a profit or gain and will need to be included in your income tax return as assessable interest received in the financial year the interest is received.