When is interest not interest but is income?
Tax Alert - February 2022
By Amy Sexton
Way back in simpler pre-Covid times (2005 to be exact), the Commissioner lost two “income under ordinary concepts” cases in the High Court. In CIR v Buis and Burston (2005) 22 NZTC 19,278 (Buis) the taxpayers received “interest” on back payments of earnings-related compensation from ACC. While the payments were called “interest” under the then Accident Rehabilitation and Compensation Insurance Act 1992 (now the Accident Compensation Act 2001), as they were not a payment in connection with “money lent” they were not covered by the specific interest income provisions of the then Income Tax Act 1994 (now the Income Tax Act 2007).
After the Buis decisions, the Commissioner published a Question We’ve Been Asked (QWBA) 09/03 Decisions on application of CA 1(2) - common law interest and income under ordinary concepts which set out that the Commissioner did not accept an aspect of the decisions; that section CD 5 of the Income Tax Act 1994 (now section CA 1(2) of the 2007 Act) could not apply to tax common law interest payments, because interest could be taxed only under the provision dealing with interest so defined (section CE 1 of the 1994 Act, now section CC 4(1) of the 2007 Act). In the Judge’s view, common law interest payments were not taxable because they did not come within the definition of “interest” in section OB 1 of the 1994 Act (now YA 1 of the 2007 Act).
A rethink by the Commissioner
The Commissioner has now had a rethink of the original court decision and QWBA and in December 2021 issued a new draft QWBA for consultation, PUB00414 Can a payment that compensates for the time value of money be taxable income if it is outside the statutory definition of “interest”? This QWBA sets out that the Commissioner now considers that the judgment in Buis can be read consistently with the Commissioner’s existing position on how s CA 1(2) applies. The Commissioner’s interpretation of the law has not changed; all that has changed is her view on whether Buis is consistent with that interpretation. The Commissioner’s view on Buis is now:
- The relevant enquiry under s CA 1(2) is whether an amount has the character of income, and this is consistent with the decision in Buis.
- The outcome of Buis is confined to its particular facts.
- Buis does not stand for a broader proposition that common law interest cannot be income under ordinary concepts or income under another provision.
- The decision in Buis is not inconsistent with the role of s CA 1(2) as a supplement to the specific income provisions of the Income Tax Act 2007.
But what is common law interest?
Common law interest is a term that is used to describe a payment that is akin to “interest”, but the payment is outside the statutory definition of interest. The payments are made to a person to compensate them for the time value of money that is owed to them but are not in relation to “money lent”, e.g., “interest” awarded as part of a damages claim or late payment “interest” for settlement of a contract. In the Buis case, the payment of “interest” was a payment of a penalty imposed on ACC for administrative delay and inefficiency.
And Income under ordinary concepts?
“Income under ordinary concepts” is a common law catch-all provision that looks to include income receipts that are not specifically provided for in Part C of the Income Tax Act 2007. There are three criteria to be considered when determining if an amount is income under ordinary concepts: income is something that comes in; income imports some notion of periodicity, recurrence, and regularity; and whether the particular receipt is income depends upon its quality in the hands of the recipient.
Don’t judge a book by its cover
Just because a payment you have received has been called an “interest” payment does not necessarily mean that it is income. If the payment is not connected to “money lent” and instead is in relation to a damages claim, a penalty or similar, the underlying transaction needs to be considered, to determine if it is in fact income and if it is taxable.
For more information, please contact your usual Deloitte advisor.
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