The AAT has affirmed a decision of the Commissioner refusing a taxpayer’s bad debt deduction claim in relation to certain trust distributions.
The taxpayer was a beneficiary of a family discretionary trust and, over the years, the trust determined to distribute some of the trust’s income the taxpayer. The AAT noted the trustee was a company in which the taxpayer and his wife (another beneficiary) were the only members. Some of the distributions were actually paid the taxpayer, but the bulk was credited to an account in the books of the trust in the taxpayer’s name ($227,258 in 2012). In his tax return for the year ended 30 June 2012, the taxpayer claimed a deduction of $227,258 on the basis that it was a bad debt under 25-35 of the ITAA 1997.
Before the AAT, the taxpayer contended that only id=”mce_marker”42,545 of the $227,258 amount written off was deductible pursuant to s 25-35. It was argued that the debt was to be characterised as unpaid trust entitlements and that the debt written off had the same character of the trust distributions included in his assessable income in the 2005 and 2007 income years.
Following analysis of the distribution transaction and the trust deed, the AAT was of the view the taxpayer’s entitlement was paid in the manner prescribed by the deed, and once paid, lost its character as unpaid entitlement. The AAT was also of the view that the debt written off was different in character to the income included in the taxpayer’s assessable income in the 2005 and 2007 income years.
(AAT Case [2014] AATA 532, Re Pope and FCT, AAT, Ref No: 2014/669, Hack DP, 4 August 2014.)
[LTN 149, 5/8/14]