Edited version of your written advice

Authorisation Number: 1051464948457

Date of advice: 13 December 2018

Ruling

Subject: Interest income

Question 1

Is the amount paid assessable income for the year ended 30 June 2019?

Answer

Yes.

Question 2

Are you entitled to a deduction for the costs of the money held by the court?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2019

The scheme commenced on

1 July 2018

Relevant facts

Entity A went into receivership.

The receiver paid money to the court. The company was never wound up.

For many years, this money with the court has accrued to a balance of $xxx. Entries show interest and costs.

Recently a liquidator was appointed.

Since this time, the company has been re-registered with ASIC and now have an Australian Business Number and tax file number.

The balance of the funds was paid to entity A in the income year ended 30 June 2019.

Entity A did not have access to the funds prior to this.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

Income Tax Assessment Act 1997 section 8-1.

Reasons for decision

Assessable income

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.

Ordinary income has generally been held to include interest income. Interest income from bank accounts are assessable to the entity who derives the income and is beneficially entitled to the income.

As stated in paragraph 47 of Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings, the general principle is that interest is only derived, or arises, when it is received or credited.

The payment of the interest amounts relating to the money held by the court was paid as a lump sum amount to entity A recently. Before this time, entity A did not have access to or entitlement to the funds.

During the years the court held the funds, the account was earning interest and also had associated costs. It is not considered that the company derived the interest income during the period the account was owned and operated by the court.

As entity A did not receive the total interest income, it is not considered that this full amount forms part of the company’s assessable income. However the company received additional proceeds of $xxx. It is this net amount that is considered to be assessable to the company for the year ended 30 June 2019.

Therefore, this amount is ordinary assessable income and should be declared on the tax return for the year ended 30 June 2019.

Allowable deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. Generally, a taxpayer incurs an expense at the time they owe a present money debt that they cannot escape.

It is not considered that the costs of the moneys held by the court were incurred by entity A. Therefore no deduction is allowed for the associated costs.