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Edited version of private advice
Authorisation Number: 1052047867787
Date of advice: 24 October 2022
Ruling
Subject: Assessability of interest income
Question
Is interest income derived, and thus assessable under section 6-5 of the Income Tax Assessment Act 1997 (the ITAA 1997), by the Trustee in his capacity as Trustee for a deceased estate in each of the years ended 30 June 20XX to 20XX that it accrues to the estate?
Answer
No
The interest income is assessable under section 6-5 of the ITAA 1997 in the income year it is received, i.e. the income year ended 30 June 20XX.
This ruling applies for the following periods:
Income year ended 30 June 20XX
Income year ended 30 June 20XX
Income year ended 30 June 20XX
Income year ended 30 June 20XX
The scheme commences on:
2 August 20XX
Relevant facts and circumstances
1. The Trustee is a resident taxpayer.
2. The Trust is in relation to a deceased estate.
3. The Trustee was granted probate in relation to the deceased's will.
4. X was a beneficiary of the Trust.
5. The Trustee was not in the ruling period:
• a financial institution under the definition in paragraphs 14-23 of the Taxation Ruling TR 93/27.
• in the business of money lending.
• carrying on a business.
• investing in cum interest securities.
• providing credit to customers as regular feature of business activities where the interest is charged on an accruals basis.
6. In the income year ended 30 June 20XX, The Trustee entered into an agreement to loan X funds (the Loan) to enable X, through his company, Y (the Company), to make a purchase from another organisation.
7. The Company was the Chargor and Guarantor of the Loan.
8. The Loan was secured against all of the assets of the Company. A Guarantee and Indemnity Agreement was also entered into on the same date.
9. A Security Agreement was entered into between X and the Trustee securing the Loan against several assets owned by X.
10. The Trustee submitted it did not receive repayments of the amounts loaned to X under the terms of the Loan.
11. As a result, the Trustee commenced legal action in 20XX to recover the money owed.
12. In 20XX, an administrator of the Company was appointed.
13. A Deed of Company Arrangement (DOCA) was entered into in 20XX, between the Administrator, the Company (Administrator Appointed) and X.
14. Under the terms of the DOCA the Loan was secured by:
(a) a second mortgage over the Property;
(b) a guarantee from the Company;
(c) a security interest in the Company; and
(d) a charge granted by a named individual over that individual's share portfolio.
15. In the absence of a written agreement between the Company (as the Chargor) and Trustee (as Chargee), the interest accrued at a rate determined by the Trustee (who was not obliged to notify the Chargor).
16. Where X did not pay back the loan by the due date, the Company (as the Chargor) was liable to pay interest on the outstanding amount from the due date up until the date of payment, with interest calculated on actual days elapsed and a year of 365 days.
17. The Trustee (as Chargee) was able to capitalise any part of any interest, from which time the interest became payable and the Chargor must pay interest upon capitalised interest in accordance with the Deed.
18. A copy of the schedule of the payment of advances shows a total amount payable to the Trustee relating to the income periods ending 30 June 20XX to 30 June 20XX.
19. The DOCA was entered into between the Trustee, the Company and the Administrator of the Company.
20. The DOCA states the Loan outstanding to the Trustee.
21. The DOCA states that, X (as director of the Company), during the DOCA Period, was to honour his obligations to pay interest to the Trustee, subject to other clauses of the DOCA.
22. Payment in settlement of the Loan was received by the Trustee in the income year ended 30 June 20XX, including at least a part payment of interest accrued on the Loan principal.
23. The Trustee was not in the ruling period:
• a financial institution under the definition in paragraphs 14-23 of the Taxation Ruling TR 93/27
• in the business of money lending
• carrying on a business
• investing in cum interest securities
• providing credit to customers as regular feature of business activities where the interest is charged on an accruals basis.
24. The Trustee was in the ruling period:
• investing certain of the assets of the Trust until the assets are administered and distributed.
• investing certain assets of the Trust in an at-call savings account (on which interest was paid monthly) and in a managed fund (which includes various term deposits).
Relevant legislative provisions
Section 6-5 of the Income Tax Assessment Act 1997
Reasons for decision
Issue 1
Question 1
Is interest income derived, and thus assessable under section 6-5 of the ITAA 1997, by the Trustee for the deceased estate, in each of the years ended 30 June 20XX to 20XX that it accrues to the estate?
Summary
No. The interest income on the Loan is assessable under section 6-5 of the ITAA 1997 to the Trustee in its capacity as trustee for the deceased estate on receipt in the income year ended 30 June 20XX.
Detailed reasoning
25. Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived during the income year.
26. Interest income is assessable as ordinary income under section 6-5 of the ITAA 1997. When interest income is derived, and thus assessable, is outlined in Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings at paragraph 47.
27. As a general rule, interest income is derived when it is received on a cash basis (or credited) unless it is:
• interest from a business of money lending carried on by the taxpayer;
• interest derived by a financial institution (Taxation Ruling TR 93/27); unless from a 'non-accrual loan' (Taxation Ruling TR 94/32);
• interest derived on a customer's overdue account where the provision of credit to customers is a regular feature of the business activities of the taxpayer and the interest is charged on an accruals basis. The interest owing by customers at the end of the year is assessable income derived in that year, even though it has not yet been received;
• interest derived by taxpayers, whose other income is calculated on an accruals basis, who invest in fixed or variable interest securities cum interest (Taxation Ruling TR 93/28); and
• interest from deposits made in the ordinary course of carrying on a business, where the business income is properly assessable on the earnings basis, may be derived on a due and receivable basis. An example of this would be a large trading business that actively manages its funds on deposits. (Paragraph 47 of the Taxation Ruling TR 98/1).
28. The Trustee (in his capacity as trustee of the deceased estate) loaned funds to X (who is also a beneficiary of the Trust) from within the income year ended 30 June 20XX. The Loan to X was guaranteed by the Company, for the purpose of making a purchase from another organisation.
29. The Company (as guarantor) was liable for interest on any outstanding loan repayments owed by X.
30. The interest on the outstanding Loan accrued at a rate determined by the Trustee from the due date for repayment up until the date of payment.
31. X did not repay the Loan, including accrued interest, when due.
32. The Trustee took legal action to try to recover the unpaid principal and interest accrued.
33. Settlement of the Loan took place in the income year ended 30 June 20XX, with at least part of the outstanding interest accrued paid to the Trustee in the same income year.
34. As stated above, interest is derived, and therefore assessable under section 6-5 of the ITAA 1997 when it is received or credited, unless one of the circumstances outlined in paragraph 47 of the TR 98/1 applies.
35. The Trustee is not a financial institution under the definition in paragraphs 14-23 of the Taxation Ruling TR 93/27.
36. The Trustee is not carrying on a business.
37. The Trustee is not in the business of money lending, nor does it provide credit to customers as a regular feature of business activities where the interest is charged on an accruals basis.
38. The Trustee is investing assets of the Trust in an at-call savings account and a managed fund with various term deposits, until the assets are administered and distributed.
39. Neither the savings account nor the managed fund falls within the definition of a cum interest security defined in paragraphs 19-26 of the TR 93/28.
40. The circumstances outlined in paragraph 47 of the TR 98/1, therefore, do not apply.
41. As the circumstances in paragraph 47 do not apply, the interest received by the Trustee on amounts loaned to X (from the income year ended 30 June 20XX) is assessable in the income year of receipt, i.e. the income year ended 30 June 20XX.