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27 Jun 11 Beneficiaries not presently entitled, deductions disallowed – Antonopoulos

Deductions claimed by beneficiaries of a discretionary trust were disallowed on the ground that the relevant expenses were not incurred in gaining or producing assessable income from trust distributions, since the beneficiaries were not presently entitled to income from the trust at the relevant time.

The taxpayers were husband and wife. The husband was a builder. They were potential beneficiaries of a discretionary trust, the trustee of which was a company; the husband was the sole director and the sole shareholder of the company. The husband was named in the schedule to the trust deed as the primary beneficiary and the default beneficiary. The wife was a secondary beneficiary.

The taxpayers claimed deductions for interest and borrowing expenses in respect of amounts borrowed by them and advanced to the trustee as working capital for the business, and in respect of amounts borrowed to purchase certain properties.

The issue was whether the expenses claimed as deductions were incurred in gaining or producing assessable income derived by the taxpayers by way of trust distributions in the relevant years. This turned on whether the taxpayers were presently entitled to the income of the trust. This in turn depended on the legal effect of certain resolutions by the trustee.

The Administrative Appeals Tribunal held that, in making its initial resolutions, the trustee had done no more than give “due consideration” to making trust distributions when it came to exercise its discretion in the future. This was insufficient to produce an immediately vested and indefeasible interest in the income of the trust. The taxpayers were not presently entitled to the trust income, and their expenses were not deductible against such income. Later resolutions recognised that the beneficiaries now had an immediate and indefeasible right to income applied or set aside.

The Tribunal also rejected a subsidiary contention to the effect that, as the default beneficiary of the trust, the husband was presumptively entitled to income unless the trustee chose to exercise its discretion in favour of some other beneficiary.

On the matter of penalties, the Tribunal found that there was no evidence of the level of care, if any, that the taxpayers took to try to ensure that their claim was well founded. In the circumstances, the administrative penalty of 25% was properly imposed.

Re Antonopoulos and FCT [2011] AATA 431 (Administrative Appeals Tribunal, Senior Member S E Frost, 22 June 2011).