ATO Interpretative Decision
ATO ID 2002/886 (Withdrawn)
Income Tax
Assessability of compound interestFOI status: may be released
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This ATOID is withdrawn on the basis that the issue described is a straight application of the law and the matter is addressed in web content/guidance regarding the treatment of interest income.This document has changed over time. View its history.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the compound interest accrued from interest reinvested as capital in a bank account assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The compound interest accrued from interest reinvested as capital in a bank account is assessable income pursuant to section 6-5 of the ITAA 1997.
Facts
The taxpayer has invested a sum of money in a bank account and has elected to reinvest any interest accrued to increase the capital amount invested in the bank account.
The taxpayer accrues ordinary interest from the investment which is reinvested and capitalised.
The taxpayer accrues compound interest, being the interest on the capitalised interest, which is also reinvested and capitalised.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Under subsection 6-5(4) of the ITAA 1997 a taxpayer is taken to have received an amount of ordinary income when the amount is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs.
Interest is generally derived when it is received or credited (paragraph 47 of Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings).
Neither the ordinary interest nor the compound interest is paid directly to the taxpayer. All of the interest is reinvested, as the taxpayer has directed. Accordingly the taxpayer is taken to have received, and therefore derived, the interest, ordinary interest or otherwise, as soon as it is reinvested.
The ordinary interest is considered to be 'ordinary income' and, as such, is assessable under section 6-5 of the ITAA 1997 in the income year that it is reinvested.
As the compound interest is the interest on the capitalised interest, it retains the character of interest. Accordingly, the compound interest is also assessable under section 6-5 of the ITAA 1997 in the income year that it is reinvested.
Amendment History
Date of amendment | Part | Comment |
---|---|---|
25 July 2014 | Issue | Minor amendments to clarify content |
Decision | Minor amendments to clarify content | |
Facts | Minor amendments to clarify content | |
Reasons for Decision | Minor amendments to clarify content | |
Related public rulings / determinations | Inserted TR 98/1 which is referenced in the amendment |
Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 6-5
subsection 6-5(2)
subsection 6-5(4)
Related Public Rulings (including Determinations)
Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings
Keywords
Derived
Interest income
ISSN: 1445-2782
Date: | Version: | |
14 June 2002 | Original statement | |
25 July 2014 | Updated statement | |
You are here | 21 April 2017 | Archived |
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