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Edited version of your written advice
Authorisation Number: 1012948116672
Date of advice: 5 February 2016
Ruling
Subject: When does accrued interest become assessable?
Question 1
Should interest that has accrued over a 10 year period but only became payable during the 2015 income year be assessed in the year in which it was received?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2015
The scheme commenced on:
The scheme has commenced
Relevant facts and circumstances
You and your spouse loaned a sum of money to a relative some years ago and held a mortgage over the relative's property for the equivalent amount.
The terms of the mortgage stated that interest would accrue at a rate of X% per annum but no payment was required until such time as the property was sold.
Following the relative's death, the property was sold and during the 20XX income year, you and your spouse received a lump sum in settlement of the mortgage. This amount represented the repayment of the principal plus interest calculated over the period of the loan.
Relevant legislative provisions
Income Tax Assessment Act 1997 - Section 6-5
Reasons for decision
Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what is included in the assessable income of an entity.
Section 6-5 of the ITAA 1997 includes in assessable income amounts of ordinary income derived, directly or indirectly, from all sources, whether in or out of Australia, during the income year. Subsection 6-5(4) of the ITAA 1997 states that an entity derives an amount of ordinary income as soon as it is applied or dealt with in any way on the entity's behalf or as directed by the entity.
Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts, which is also known as ordinary income.
Interest income is regarded as ordinary income and is therefore assessable under subsection 6-5(2) of the ITAA 1997. Taxation Ruling TR 98/1 states that the general principle is that interest is only derived, or arises, when it is received or credited.
However, interest may be constructively received without actual receipt if it is reinvested, accumulated, capitalised, made available for the lender's use, or is otherwise dealt with at the direction of the lender.
In your case you and your spouse lent a sum of money to a relative in 200X at X% per annum interest through an agreement drawn up by a solicitor. This agreement specifically provided that no interest was payable on the loan until such time as the property was sold.
As the property was not sold until after the relative's death you had no entitlement to any interest until you received the payment of principal plus interest in the relevant income year.
Your share of the interest is therefore included in your assessable income for the relevant year.