Certain Uncommercial Trust Arrangements Under Review, Announces ATO

by Mary Swire, for LawAndTax-News.com, Hong Kong

27 March 2008

Australian Tax Commissioner Michael D’Ascenzo on Wednesday warned taxpayers and trustees of self-managed super funds to be cautious of claiming deductions in relation to trust arrangements.

Under the arrangements in question, a taxpayer uses borrowed funds to acquire an interest in a certain type of trust described in the alerts. The trust then uses the funds to purchase income-producing property.

These arrangements seek to provide income tax deductions to the taxpayer for all their interest payments and other borrowing costs, even though income or capital gains from the property may be derived by other beneficiaries of the trust, including self managed super funds.

“People should be cautious before claiming negative gearing deductions for borrowings used to fund interests in trusts with discretionary features,” Mr D’Ascenzo stated, continuing:

“Before claiming such deductions, people should make sure the relevant expense is sufficiently connected to the income and capital gains they could reasonably expect to receive from their investment.”

The Tax Office is not concerned about all 'discretionary', or 'hybrid’ trust arrangements, he went on to explain.

“Rather, we are concerned about negatively-geared trust arrangements which involve the taxpayer incurring interest expenses or borrowing costs where all or a proportion of the borrowed funds could be used for the benefit of the beneficiaries, or where the taxpayer’s interest in the trust could be brought to an end before their costs of investment have been recouped,” D'Ascenzo concluded.

If taxpayers and trustees are concerned about their trust arrangements they should obtain their own independent advice or seek a formal determination of the Tax Office’s position through a private ruling.

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