Assessability of interest paid by a relative of the taxpayer

Is the interest the taxpayer receives from a relative assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The interest the taxpayer receives from a relative is assessable under section 6-5 of the ITAA 1997 as interest is income according to ordinary concepts.

The taxpayer lent money to their relative.

Formal documentation was drawn up and the loan was on a normal commercial basis.

Interest was paid to the taxpayer by their relative under the loan.

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 3 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. The fact that the interest is paid by a relative of the taxpayer does not change the character of the receipt, it remains ordinary income.

The interest payments are therefore included in the taxpayer's assessable income under section 6-5 of the ITAA 1997.