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ATO Interpretative Decision

ATO ID 2002/886 (Withdrawn)

Income Tax
Assessability of compound interest

Attention This ATOID is withdrawn on the basis that the issue described is a straight application of the law and the matter is addressed in web content/guidance regarding the treatment of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.
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 21 April 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Date of decision: 14 June 2002

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

Siebel/TDMS Reference Number: DW463052; 1-5LREYQ3; 1-B8EMS0E

Business Line: Small Business/Individual Taxpayers

Date of publication: 31 August 2002

ISSN: 1445-2782

ATO ID 2002/886 (Withdrawn) history   Top  
   Date   Version 
   14 June 2002   Original statement   
   25 July 2014   Updated statement   
 You are here ®  21 April 2017   Withdrawn   


 


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