Income tax: foreign income: is a lump sum payment received by a controlled foreign company (CFC), as consideration for the assignment of an interest stream, passive income for the purposes of Part X of the Income Tax Assessment Act 1936 (the Act)?

Yes. Where a CFC (assignor) assigns an interest stream in return for a lump sum payment, the payment falls within the definition of passive income under subsection 446(1) of the Act. The lump sum payment is tainted interest income as defined in section 317, and therefore constitutes passive income under paragraph 446(1)(d). Tainted interest, as defined, includes interest or a payment in the nature of interest.

Where the assignor assigns his mere right to interest, and receives compensation from the assignee in the form of a lump sum in lieu of periodic interest payments, the assignor simply converts the future interest stream into present income. The payment received from the assignee is a receipt having the same character as the payments the assignor would have received under a loan or similar indebtedness. Accordingly, the lump sum payment is regarded as being interest or a payment in the nature of interest. Authority for this proposition is found in the cases of Re Hawkins (deceased) Hawkins v. Hawkins and anor [1972] 3 All ER 386 and Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v. National Bank of Greece, SA [1969] 3 All ER 504. The lump sum payment is therefore passive income.

Alternatively, the disposal of a right to receive interest (a chose in action) constitutes the disposal of a tainted asset as defined in section 317. The lump sum payment received in respect of the disposal of the tainted asset is passive income under either paragraph 446(1)(j) or (k).