Edited version of your written advice

Authorisation Number: 1013009957252

Date of advice: 11 May 2016

Ruling

Subject: Assessability of interest

Question

Is the interest derived assessable income of the company?

Answer

No

This ruling applies for the following periods

Year ending 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

The scheme commenced on

22 April 2008

Relevant facts

• The Company was established for the sole purpose of administering and distributing for 'Approved Purposes' a specified sum of money (the Funds) transferred to it by a Commonwealth Department (the Department).

• The types of activities that constitute Approved Purposes are specified in the establishing Deeds entered into between the relevant parties.

• The Deeds specify that the Company holds the Funds in trust for the Department and may only use the Funds for specified Approved Purposes. Subject to this, the Department does not have an ongoing beneficial interest in the Funds.

• The Deeds specify that the Funds will consist of both the initial lump sum payment made by the Department to the Company and any interest income earned on the investment of the Funds.

• The Company must provide the Department with a twice yearly report detailing all new projects approved to receive monies of the Fund.

• The Deeds also require that the Funds be held in an account with an authorised deposit-taking institution, and this account must be separate from the Company's other operational accounts.

• On termination of the Deeds, any funds remaining in the account must be repaid to the Department unless the Company has obtained written consent to retain the funds and use them for a purpose agreed to by the Department.

• In certain circumstances, specified in the Deeds, the Company will be required to return to the Department all unexpended Funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 6-5

Reasons for decision

Summary

Interest accruing to the account which holds the Funds is not ordinary or statutory income of the Company.

Detailed reasoning

Interest earned on money held in a bank account is ordinarily income from property and assessable to the owner of the bank account.

In the present case, in order to answer this question, it is necessary to determine the nature of the relationship between the Company and the Department.

The nature of the relationship between the Company and the Department

Prior to the establishment of the Company, the Department was responsible for administering an Industry Fund. The initial lump sum amount transferred by the Department to the Company pursuant to the arrangement comprised all monies that were currently held in that Industry Fund.

Certain features of the arrangement point to the existence of a fiduciary relationship between the Company and the Department. In Hospital Products Ltd v. United States Surgical Corporation (1984) 156 CLR 41 Mason J made the following observations about fiduciary relationships (at 97):

The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.

By entering into the arrangement, the Company agrees to apply the Funds for Approved Purposes. The source of the funds transferred to the Company by the Department was the Industry Fund, which was previously established by the Department for an industry related purpose. Therefore the Company can be said to be acting on behalf of the Department in making disbursements of these funds for industry related purposes.

The arrangement clearly guards against abuse by the Company. The terms of the arrangement confine the use of the Funds to Approved Purposes which are clearly defined in the establishing documents. The fact that this protection is expressed in a contract is not inconsistent with the existence of a fiduciary relationship (Quistclose Investments Ltd v. Rolls Razor Ltd [1970] AC 567).

A second critical feature is that the fiduciary may not profit from the position in which he or she is placed: see Boardman v. Phipps [1967] 2 AC 46 and cases referred to there by Lord Guest at 115-116; also Pavan v. Ratnam (1996) 23 ACSR 214 per Mahoney ACG at 217. The fiduciary must treat his or her own interests as subservient to the interests of the principal, in this case, the Department. The fiduciary must account for any profit made without the knowledge and consent of the principal. These elements are clearly present.

The Company can only use the funds for Approved Purposes. In addition, any interest accruing becomes part of the Funds and can only be used for Approved Purposes.

Further, to say that the Company holds the Funds for its own benefit fails to give proper significance to the totality of the arrangement. The Company holds the Funds for the Approved Purposes and applies them on behalf of the Department.

In addition, an express obligation to keep the Funds separate from any other monies that the Company may have points to the existence of a trust - that is, a fiduciary obligation: Cohen v. Cohen (1929) 42 CLR 91, referred to by the majority of the High Court in Associated Alloys Pty Limited v. ACNB 001 452 106 Pty Limited (in liquidation) (formerly Metropolitan Engineering and Fabrications Pty Limited) [2000] HCA 25 at [34].

This obligation is clearly present. The establishing documents require the Company to

• hold the Funds in an account in the company's name, and which the company solely controls,

• the account must be with an authorised deposit-taking institution authorised under the Banking Act 1959 (Cth) to carry on banking business in Australia,

• the account must be separate from the company's other operational accounts, and

• ensure that the Funds, including all receipts and expenditures of the Funds, are separately identified within the company's accounts and records so that at all times the Funds are identifiable and ascertainable.

These characteristics of the arrangement strongly point to the Company being in a fiduciary relationship with the Department.

The scope of the fiduciary relationship

The subject matter of the establishing documents is the provision of the initial lump sum amount to the Company in order for the Company to apply the Funds for Approved Purposes. Apart from holding and applying the Funds for the Approved Purposes, the Company has no other obligations to the Department under the arrangement. It is clear, then, that the scope of the Company's fiduciary obligations to the Department under the arrangement relates to the Company's holding and application of the Funds.

The fiduciary duties owed by the Company to the Department indicate that the Funds are not beneficially held and used by the Company for its own purposes but are held and used on behalf of the Department.

The receipt of the initial lump sum amount by the Company is not in relation to the carrying on of a business.

However, whether the Funds have been received for services rendered must be examined, as payments to a taxpayer for services rendered are assessable income, even though the taxpayer does not provide those services as an employee or in carrying on a business.

Under the terms of the arrangement, the Company receives the initial lump sum amount and is required to apply the Funds for Approved Purposes; however it does not receive any additional amounts from the Department for undertaking this role. Furthermore, any taxes, duties and government charges in connection with the Funding Deed must be borne by the company. If the Company defaults on its obligations to apply the Funds for Approved Purposes, then under the terms of the arrangement, the balance of the Funds are returned to the Department.

In these circumstances, the Funds are not a payment for services rendered.

In the present case, it is clear that the Company cannot deal with the money as its own. Its obligations in dealing with the Funds have the nature of fiduciary obligations.

Accordingly, interest accruing to the account is not ordinary or statutory income of the Company.