Assessable Income - Interest income calculated at a higher rate (normal rate plus penalty)

Are interest payments made to the taxpayer on an investment at a higher rate (normal rate plus penalty) for breaches of loan conditions, assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Interest payments made to the taxpayer on an investment at a higher rate (normal rate plus penalty) for breaches of loan conditions are assessable income under section 6-5 of the ITAA 1997 as the payments are ordinary income.

The taxpayer made a substantial investment in a mortgage fund. Subsequently, the mortgage fund was placed under external administration.

The taxpayer received from the administrator an amount less than the original investment in the mortgage fund. The receipt from the administrator comprised: • return of capital; • interest calculated at the higher rate (normal rate plus penalty); and • interest calculated at the normal rate for compliance with the loan conditions.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business. In many instances there can be no dispute as to the character of a receipt, for example salary, wages and interest payments are clearly ordinary income. Interest calculated at a higher rate (normal rate plus penalty) is income from property and the higher interest rate was imposed as a penalty for non-compliance with the loan conditions.

Interest payments made to the taxpayer on an investment at a higher rate (normal rate plus penalty) for breaches of loan conditions are ordinary income and are therefore assessable income under section 6-5 of the ITAA 1997.