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 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