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The Administrative Appeals Tribunal has affirmed the Commissioner’s decision disallowing claims for deductions in relation to interest on bank loans taken out to purchase investment properties. The clear evidence was that the taxpayer borrowed the money, not in his personal capacity, but in the capacity of trustee of a family discretionary trust. In effect, the entity for taxation purposes which borrowed moneys for the purchase of the investment properties was the family trust: Re Lambert and FCT [2013] AATA 442 (Egon Fice, Senior Member, 27 June 2013).

The taxpayer had established a family discretionary trust. He had also executed a deed of variation to vary the trust deed, the intended effect of which was that the taxpayer would receive the entire income from the trust fund in each accounting period unless he gave notice to the trustee (himself) in writing that he should not receive all of the income. He then borrowed money from a bank in order to purchase investment properties.

Rental income was received from the trust properties by the taxpayer into his personal bank account and, according to him, he met the bank expenses in setting up the loans and made the loan repayments including the interest payments in his personal capacity.

The taxpayer claimed deductions for interest paid on the bank loans. The Commissioner disallowed the claims, and the matter went to the Tribunal.

The Tribunal made the following findings:

  1. A beneficiary under a discretionary trust is not a person who is presently entitled to income and therefore cannot establish a nexus between borrowing expenditure incurred and assessable income resulting from the use of the borrowed moneys. It was for that reason that the taxpayer decided that the trust deed should be amended so as to make it clear that he had a present entitlement to the distribution of income from the trust.
  2. The purported deed of variation was an invalid exercise of the discretionary power set out in the trust deed.
  3. On the evidence, the bank lent the moneys which were then used for the purchase of the properties from which rental income was derived to the taxpayer in his capacity as trustee of the family trust. Therefore, the liability for interest payments on the bank loans fell on the taxpayer in his capacity as trustee. The entity for taxation purposes which borrowed moneys for the purchase of the investment properties was, in effect, the family trust.
  4. The taxpayer had no more than a mere expectancy of receiving income from the trust from time to time as he was not presently entitled to the income of the trust when the expenditure was incurred. He was not entitled to a deduction for interest expenditure because there was insufficient nexus between the outgoings and the derivation of the assessable income.
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