ap_int01

Interest

Interest - assessed as income according to ordinary concepts

Interest assessed as statutory income - sec 159GQ & 26C

Amount received on redemption of Commonwealth Special Bonds

Interest -

assessed as income according to ordinary concepts

You will now be aware that unless specifically exempted, any receipt, which would come within the accepted usage of the word 'income', will be included in assessable income

Interest is assessed under section 6-5 (1) as ordinary income (income according to ordinary concepts)

6-5 Income according to ordinary concepts (ordinary income)

Your assessable income includes income according to ordinary concepts, which is called ordinary income.

So far, so good! Ordinary income is anything that the man in the street would consider to be income

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

What if the income was derived outside Australia?

It all depends upon whether you are a resident!

If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

If you are a resident of Australia,

you include income from all sources,

in or out of Australia

(3) If you are not an Australian resident, your assessable income includes:

(a) the *ordinary income you *derived directly or indirectly from all *Australian sources during the income year; and

(b) other *ordinary income that a provision includes in your assessable income for the income year on some basis other than having an *Australian source.

If you are NOT a resident of Australia,

you include only income from sources in Australia unless some provision of the tax law requires you to include non Australian income

So because people have always considered interest to be a receipt in the nature of income and sec 6 includes income according to ordinary concepts in assessable income it is included in assessable income.

Answer this question….

Will a resident taxpayer have interest from sources outside Australia included in his assessable income?

Yes No

Sec 6 includes the gross income derived directly or indirectly from ALL sources whether in or out of Australia in the assessable income of a resident.

Sec 27 (1) of the 1936 Assessment Act deems interest to have an Australian source if the loan is raised in Australia even by the government of a foreign country.

Sec 27(2) deems a loan to be 'raised in Australia' if subscriptions to the loan were invited in Australia by public advertisement by the issue of a prospectus or otherwise

Sec 25(2) of the 1936 Assessment Act also deems interest to have an Australian source if it is paid on money secured by a mortgage on any property in Australia, unless the interest was paid outside Australia to a non-resident on debentures issued outside Australia.

Answer this question….

Will a NON RESIDENT taxpayer have interest, which has been paid by an Australian business included in his assessable income?

Yes No

Such amounts are generally not included in assessable income of the non- resident but a 10% withholding tax is levied against them under sec 128B of the 1936 Assessment Act.

Refer para 22-020 of CCH Master Tax Guide for more details.....

Answer this question….

A bank account offsets 'interest' that would otherwise be payable against a loan the depositor has with the bank Would the amount offset be included in assessable income as interest?

Yes No

Refer Ruling TR 93/6 (see para 10-470 of the CCH Master Tax Guide) As long as there are separate savings and loan accounts and the customer has no legal or equitable entitlement to receive interest on deposits.

Answer this question….

A father of 6 children places $400 of his money in a bank account in the name of each child Will the interest on the 6 accounts be included in his assessable income?

Yes No

Refer Taxation Ruling IT 2486 (see para 10-480 of the CCH Master Tax Guide) If the parent provided the money and may spend it as he likes the Commissioner deems the money and the interest to belong to the parent

Other provisions under which interest is assessable

You can purchase interest-bearing investments, which pay no interest for a set period of time. Let's say 10 years.

You hold on to your investment and get nothing for 10 years but at the end of that time you 'sell' the investment back to the person who sold it to you originally for what you paid plus all the interest you have earned over the 10 years.

If such an investment comes within the definition of a QUALIFYING SECURITY in section 159 GP (1) then amounts can be included in assessable income by sec 159 GQ. They will be included over the course of the life of the investment (10 years in our example) rather than at maturity (the end of the 10 year term) or when the investment is sold before maturity.

So what is a QUALIFYING SECURITY?

It is defined in sec 159 GP (1) as any security that is issued after 16/12/84 will have or is reasonably likely to have a term of more than 1 year has an eligible return (we will look at what this means shortly)

Where the amount of ELIGIBLE RETURN (Yes! We will look at what it means soon) can be established at the time of the issue of the investment, that ELIGIBLE RETURN must be 1.5% of the sum of the payments multiplied by the number of years (part years) of the security

So what is this ELIGIBLE RETURN

It is defined in sec 159 GP(3)

A QUALIFYING SECURITY will be deemed to have an ELIGIBLE RETURN if at the time it is issued it is reasonably likely that....

the sum of all payments received by the holder of the security (other than periodic interest payments) (in other words, amounts paid each year or however often the security pays interest)

WILL EXCEED the issue price of the security (how much you paid for it).

How can you tell if it is reasonably likely that the sum of the payments will exceed the issue price?

You can take into account the fact that the security was issued at a discount (for example you got a security with a face value of $1000 for only $500)

The security comes with a promise that the interest will be deferred until the end of the term when it will be paid in one lump sum) is capital indexed (you are guaranteed that the face value of the security will increase by a certain amount each year)

Any other reason (that's what sec 159 GP(3) says)

Sec 159 GQ includes part of 'eligible return' in the assessable income of the security holder.

There are a couple of conditions that must exist before sec 159 GQ can include part of the eligible return in income...

Sec 159GR & GS ensure that no part of the eligible return can be included on realisation or maturity to extent it has already been assessed under sec 159 GQ - in other words you can not be taxed twice on the same interest

Sec 159 GX ensures that no amount can be included in assessable income by sec 159 GQ unless it would have been assessable as interest at the end of the term of the security. In other words the Commissioner can not just manufacture bits of income to include in the assessable income of taxpayers

A variation on this type of investment is the DEBT DEFEASANCE arrangement.

In this scheme the lender is released from the need to pay back a loan after a certain period of time instead of receiving interest on an investment he has made.

The Commissioner treats the gain made by the borrower as a 'discount' and is taxed on this amount - refer Taxation Ruling IT 2495 - see para 10-490 of the CCH Master Tax Guide

Answer this question….

A company assigns the right to receive interest under an $80 million loan to a finance company for a consideration consisting of a lump sum of money.

Can the 'one off' receipt be included in assessable income

Yes No

Refer para 10-020 of CCH Master Tax Guide - FC of T v Myer Emporium Ltd. Among other reasons the High Court considered the payment was received IN! EXCHANGE FOR the future interest it would have received so it was interest. So interest can be received in a 'once off' lump sum and still be interest.

Yet another statutory rule concerning interest…

Amount received on redemption of Commonwealth Special Bonds

Sec 23 E(1) of 1936 Assessment Act includes the amount received on redemption of Commonwealth Special Bonds which are issued under the Commonwealth Inscribed Stock Act Premiums paid on the redemption of such bonds are EXEMPT under sec 23 E