Opinion Number. 753

Subject

INCOME TAX WHETHER TAX IS PA YABLE ON INTEREST ACCRUING PRIOR TO YEAR OF ASSESSMENT BUT NOT RECEIVED UNTIL SUCH YEAR: INCOME DISTINGUISHED FROM MERE RIGHT TO RECEIVE PAYMENT

Key Legislation

INCOME TAX ASSESSMENT ACT 1915, ss. 10 fl), 14 (b), 28 (1)

Date
Client
The Commissioner of Taxation

The Commissioner of Taxation has forwarded the following memorandum for advice:

As required by section 28 (1) of the Income Tax Assessment Act, a taxpayer rendered a return of income for the period 1.7.14 to 30.6.15, which included interest as under, derived from debentures:

City of Sydney £1156.5.0
City of Brisbane 34.5.3
Australian Gaslight Company 160.0.0

The taxpayer claimed a rebate of half each amount in respect of the proportion thereof accruing prior to 1.7.14. He was asked whether the amount represented by the rebate claimed was actually received within the period covered by the return and replied that such was the case but, on the advice of his solicitors, to the effect that under the law that interest accrues de die in diem, he claimed the rebate.

The taxpayer was taxed on the whole amount on the ground that it formed portion of his income derived from sources within Australia, as provided by section 10(1) and section 14 (b), during the taxable period. He has now objected in the following terms:

I hereby object to the assessment in respect of income tax for the financial year 1915/16 made by the Commissioner of Taxation and issued to me by Notice of Assessment dated 4th February 1916 and claim that the assessment of my taxable income should be based on the following amounts:

Income from personal exertion £
Income from property 5083
5083
Less allowable deductions 1011
Taxable income £4072

My reasons for claiming that the assessment should be on the figures stated above are:

  1. That the item 'Income from Property' as shown above and in my return of income of 8th November 1915 has been wrongly increased in the said Notice of Assessment to the extent of £675 by the inclusion therein of interest accruing prior to the 1st day of July 1914 from-
  2. City of Sydney Debentures £578
    City of Brisbane Debentures 17
    Australian Gaslight Company 18
    £675
  3. That the said sum of £675 is not taxable under the Income Tax Assessment Act 1915 or under any Act amending the same.
  4. That in particular the said sum of £578 derived from interest on debentures of the City of Sydney is not taxable under the Income Tax Assessment Act 1915 or any Act amending the same, such interest being payable on the 30th day of June 1914 though not received by me till after that date.
  5. That the Commissioner's claim for income tax in respect of the said sum of six hundred and seventy-five pounds is ultra vires the said Act.
  6. That the provisions of the said Acts generally show that on a proper construction of such Acts the intention is not to impose tax on income accruing due before the 1st day of July 1914.

I shall be glad of your opinion as to whether the Department's assessment is in accordance with the law.

The income in this case was not received until the year of assessment, but part of it accrued due from day to day during a period preceding the year of assessment.

Section 28 (1) requires returns to be made of income derived from sources in Australia during the financial year from 1 July 1914 to 30 June 1915. The case hinges upon the meaning of the word 'derived'. The taxpayer contends that income is derived the moment it accrues due, and as the interest on money lent accrues due from day to day, part of the income was derived before the beginning of the taxation period.

The meaning of the word 'derived' was mentioned by the Privy Council in the case of the Commissioners of Taxation (N.S.W.) v. Kirk [1900] A.C. 588. In that case, Lord Davey, in delivering the judgment of the Privy Council, said: 'Their Lordships attach no special meaning to the word "derived", which they treat as synonymous with arising or accruing'.

In that case, however, the Court was not dealing with the question of when the income was derived, but from what source it had been derived. The income having been got in, the question then remained as to what was the source from which it had been derived. In this aspect of the case, the terms 'derived', 'arising' or 'accruing' are doubtless synonymous, but when the questions of when the income was derived are under consideration, and whether interest is income before it reaches the hands of the taxpayer, I do not think that these terms are necessarily synonymous.

It should be borne in mind that the Act deals with the taxation of income. Until interest has been received by the person, can it be said to be income at all?

In the present case, although the interest accrues to the taxpayer from day to day, it is not due and payable to him except at certain specified periods. Until he has received the interest, it is either something to which he is entitled at a future date or something which is due to him, but has not yet been paid. In both of these cases, until the interest is actually in the hands of the taxpayer, he has only the right to receive payment of a sum of money either at a future date or immediately. Such a right is not income.

In Murray's Oxford Dictionary, the word 'derive' is given as meaning 'gain' or 'obtain' from a source.

Income cannot be said to have been gained or obtained by a taxpayer until the money or interest constituting it has come into the hands of the taxpayer.

In the present case, the interest on the debentures was not paid until after 1 July 1914, so that it was received by the taxpayer in the taxation period in question.

In my opinion, the Departmental assessment in this case is correct.

[Vol. 14, p. 483]