The AAT has upheld the Commissioner’s decision to disallow the taxpayer’s claim for deductions for interest and bank fees of over id=”mce_marker”20,000 incurred [over 2 years] in relation to rental properties purchased by a family discretionary trust that had been set up for that purpose and of which he was the trustee.
[The Taxpayer intended to borrow from a bank in his own capacity, lend that money interest free to a discretionary trust, of which he was also trustee, to enable it to buy three investment properties, and then get all the income from the trust, to support the interest deductions outside the trust. He was aware that relying on a discretion being exercised each year was not enough, and sought to cure that by a resolution of the trustee to distribute all the Trust’s income to the Taxpayer, unless he advised otherwise prior to the end of the year.]
In arriving at its decision, the AAT found that objective evidence overwhelmingly disclosed that the bank lent the money to the taxpayer in his capacity as trustee for the trust and not in his personal capacity [so the negative gearing fell in the Trust, not in the Taxpayer’s hands – see further comments below].
But if the Tribunal were wrong about that, it found that a deed made immediately after the trust had been established, to make the taxpayer the sole beneficiary of all the rental income from the trust, was ineffective and that, the taxpayer could not argue that there was the relevant nexus between the interest and bank fee outgoings incurred and the deriving of any assessable income from the trust.
And the Tribunal further found that this deed was not effective as a deed of variation as it did not mention the variation power and was not exercised for the benefit of beneficiaries as a whole.
In arriving at its decision, the AAT also noted that even if the distributions of rental income were properly made to the taxpayer pursuant to the discretionary power in clause 15 of the trust deed, the taxpayer had no more than a mere expectancy of receiving rental trust income as he was not presently entitled to the income when the relevant expenditure was incurred and, as a result, there was an insufficient nexus between the outgoings and the derivation of the assessable income.
The AAT also found that it was not in a position to interfere with the Commissioner’s imposition of 25% shortfall penalties for failing to take reasonable care as the taxpayer had not complied with the requirements for objecting against their imposition and, in particular, stating the grounds for their remission.
(AAT Case [2013] AATA 442, Re Lambert and FCT, AAT, Ref 2012/0664 & 2012/0665, Fice SM, 27 June 2013.)
[LTN 124, 1/7/13]
[FJM Note: the bank leant to the taxpayer in his capacity as trustee (wrongly) instead of as beneficiary, but this could not be vitiated as a mistake [para 55], though the loan was brought to an end later (in 2012) when it was re-issued to him as a beneficiary [para 52]. The ATO therefore denied the deductions to the taxpayer, as being actually incurred by the Trust (not the trustee/beneficiary in his personal capacity). The AAT also held that the purported exercise of the Trust’s power to distribute its income to the trustee (in his personal capacity) was ineffective (as the power had to be exercised annually, upon a proper consideration, and was absolutely discretionary). As a result, it held that the beneficiary’s interest in the income was insufficient to give it the required income earning nexus for interest deductions (in case it was wrong about the earlier conclusion).]