Edited version of your written advice

Authorisation Number: 1012699195243

Ruling

Subject: Interest income

Question

Does the interest income derived from money lent to a third party form part of your assessable income?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

1 July 2013

Relevant facts

You provided an interest free loan to entity A.

The money was invested in a term deposit.

The term deposit is in the name of entity A.

The interest from the term deposit is credited to entity A's at-call account. They have the use of the funds.

At maturity date, you will decide on whether to extend the loan.

The funds in the account are not used by you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

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 during the income year. Interest income is considered to be ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Interest income from bank accounts is assessable to the person who derives the income and is beneficially entitled to the income. The person/s in whose name the investment is taken out will generally be considered to be beneficially entitled to the income from the bank account unless there is evidence to the contrary.

Taxation Determination TD 92/106 Income tax: who should be assessed to interest earned on a joint bank account? states that interest income on a joint bank account is assessed to the persons who are beneficially entitled to the income. The entitlement depends on the beneficial ownership of the money in the account. The general presumption is that holders of accounts in joint names have joint beneficial ownership of the moneys in equal shares. This presumption is rebuttable by evidence to the contrary.

Evidence relevant in determining an individual's beneficial entitlement includes information as to who contributed to the account, in what proportions the contributions were made, who drew on the account, who used the money and who the interest is distributed to.

Taxation Ruling IT 2486 Income Tax: Children's savings accounts discuss the issue of money held in trust for another person. IT 2486 states that regardless of the name and type of the account, the essential question that must be asked is: 'whose money is it?'. The circumstances in each case must be considered when determining whose money it is. 

The types of evidence that may show that the ownership of the moneys in an account is someone other than the account holder/s are:

• information showing who contributed funds to the account,

• in what proportions the contributions were made,

• who drew on the account, and

• who used the money and accrued the interest as their own property.

Although TD 92/106 and IT 2486 do not specifically discuss your circumstances, the principles outlined are relevant.

In your case, you have lent money to entity A. The term deposit is held in the name of entity A. The interest is credited to and used by entity A. Although the funds originally belonged to you, you have now lent the money to entity A. The funds are held in the name of entity A and they have the use of the funds and the interest is paid to them. Therefore, the interest income derived from the account does not form part of your assessable income.