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Edited version of your written advice
Authorisation Number: 1012979626052
Date of advice: 2 March 2016
Ruling
Subject: Interest income
Question
Does xx% of the interest credited to the term deposit form part of your assessable income?
Answer
Yes.
This ruling applies for the following periods
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commenced on
1 July 20XX
Relevant facts
You were a co-owner of a property that was sold.
On settlement taking place, the net proceeds were placed in a term deposit banking account held in joint names with the other co-owner pending a resolution of the dispute or a Court verdict.
The two owners of the term deposit were in dispute as to how much of the funds belonged to each.
The parties executed Terms of Settlement. Clause 5 of the signed terms of settlement made provision for the term deposit (with interest) to be split xx%/xx% in favour of you. The terms of settlement acknowledge that this is, and has been since the settlement of the sale of the property, the entitlement of the respective parties.
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, 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 states 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.
As highlighted in Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings interest is generally derived and assessable when it is received or credited.
In your case, interest has been credited to the term deposit, however the funds were not accessed pending the resolution of the dispute.
Taxation Determination TD 92/106 Income tax: who should be assessed to interest earned on a joint bank account? provides guidance on tax issues with joint bank accounts. Interest income is assessed to the persons who are beneficially entitled to the income (MacFarlane v. Federal Commissioner of Taxation (1986) 13 FCR 356; 86 ATC 4477 at 4486-7; (1986) 17 ATR 808 at 819-20). That entitlement depends on the beneficial ownership of the monies in the account. The general presumption is that the account holders have joint beneficial ownership of the moneys in equal shares. This presumption can be rebutted with evidence to the contrary.
In your case the term deposit, which held the proceeds from the sale of a co-owned property, was opened in joint names. The subsequent Court Order awarded you xx% of the funds in the term deposit. The terms of settlement acknowledged that you have been entitled to xx% of the funds since the settlement of the sale of the property. Your ownership interest in the property and the Court Order decision is considered sufficient evidence to show that you have beneficial entitlement to xx% of the funds in the term deposit.
Therefore as you have xx% beneficial interest in the term deposit, xx% of the interest income is considered assessable income to you.
Under income tax law, whether or not you actually received any of the interest in the financial years is not relevant. The test is whether the interest was credited to an account that you were beneficially entitled to at that time.
We acknowledge your specific circumstances however, as interest income has been credited and derived in each of the relevant years, your share of the interest income is derived and assessable to you in the relevant years.
Other information
From the information provided, it cannot be conclusively determined that a trust existed with respect to the monies held in the term deposit. However if a trust did exist, it is considered that you were presently entitled to your share (being xx%) of the interest income. A beneficiary can be presently entitled whether or not the precise entitlement can be ascertained before the end of the relevant income year. Therefore your assessable income would include xx% of the interest income, which is the same result as outlined above.
Please note that the owning of a joint account does not generally constitute a trust for taxation purposes. Your case differs from the situations found in Harmer & Ors v. FC of T (1991) 104 ALR 117; (1991) 66 ALJR 89; (1991) 22 ATR 726; (1991) 173 CLR 264; 91 ATC 5000 and Walsh Bay Developments Pty Ltd & Anor v. FC of T (1995) 130 ALR 415; (1995) 31 ATR 15; 95 ATC 4378. In both these cases there were specific references for the money to be held on trust and the relevant terms of the trust were specified. However in your case, there is not sufficient evidence to conclusively show that a trust was established. Therefore the principles in the above cases cannot be applied in your circumstances.