Edited version of your written advice

Authorisation Number: 1012886560483

Date of advice: 1 October 2015

Ruling

Subject: Fund Income

Questions

1. Can a member of the fund declare the interest earned on the bank account as assessable income in the member's individual tax return?

2. Will the whole of the final withdrawal on closure of the bank account be taxed?

Answers

1. Yes.

2. No.

This ruling applies for the following period:

Income year ended 30 June 2014;

Income year ended 30 June 2015; and

Income year ending 30 June 2016

The scheme commences on:

June 2014

Relevant facts and circumstances

In June 20XX, the sole member and beneficiary set up the fund as a self-managed superannuation fund (SMSF).

The fund has a corporate trustee.

An application was made for a Tax File Number (TFN) and an Australian Business Number (ABN) for the SMSF.

An application was also made to have the SMSF become an Australian Taxation Office (ATO) regulated SMSF.

A TFN and ABN were initially issued to the fund.

On assumption that all was in order the corporate trustee opened a bank account for the fund. The member then proceeded to deposit funds into the bank account as a non-concessional contribution.

The bank account did not receive any concessional contributions.

Part of the funds in the bank account was used as a deposit for a commercial property.

The ATO contacted the member in July 20XX to inform the member that the application for SMSF registration would be audited to determine whether the fund is eligible to be regulated by the ATO and whether it is eligible to have an ABN.

The ATO subsequently informed the member that the member was ineligible to be a Director of a corporate trustee of an SMSF. This was due to the member being a member and trustee of another SMSF which was not up to date with its tax compliance.

In July 20XX, the member wrote to the ATO to advise that the member no longer wished to continue with the registration of the fund and requested that the fund's ABN be cancelled.

In August 20XX, the ATO informed the member that the member's request to cancel the fund's ABN had been actioned.

The applicant's position is that since the fund was effectively treated as if it had never been brought into existence, the corporate trustee held the bank account in a bare trust for the member. The applicant's view is that the funds in the bank accounted belonged to the member at all times.

The member is contemplating withdrawing the money from the bank account and declaring the interest earned in their personal tax return for the relevant income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 97(1)

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1936 Subsection 99B(2)

Income Tax Assessment Act 1997 Subsection 6-1(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(4)

Income Tax Assessment Act 1997 Section 307-5

Reasons for Decision

Summary

The bank interest on the bank account would form part of the member's assessable income for the relevant income years the bank account was in operation and interest was earned. The return of capital upon closure of the bank account is not to be included in the member's assessable income.

Detailed reasoning

Subsection 6-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income consists of ordinary income and statutory income. Section 6-5 of the ITAA 1997 defines ordinary income as income according to ordinary concepts.

The characteristics of ordinary income that have evolved from case law include receipts that:

• are earned;

• are expected;

• are relied upon; and

• have an element of periodicity, recurrence or regularity.

Bank interest is considered to be ordinary income and in this case forms a part of the net income of the corporate trustee. In this case, as the fund is taken to have never existed, the corporate trustee is effectively holding the funds in the bank account in a bare trust for the member.

The taxation of trust income is outlined in Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936). More specifically, subsection 97(1) of the ITAA 1936 states:

(1) Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

(a) the assessable income of the beneficiary shall include:

(i) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; and

(ii) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia…

As the member is presently entitled to the income of the trust estate and is not under any legal disability, the interest from the bank account would form part of the member's assessable income for the income years that the bank account was in operation.

As is the usual practice with a bank account, the account could be closed and the cash returned to the member. The contributions amount returned from this would be considered a return of capital. As per the operation of subsections 99B(1) and 99B(2) of the ITAA 1936, the return of capital is not to be included in the member's assessable income as the amount would represent the corpus of the trust estate.