It’s been a long time coming, but the tax office finally got around to testing a hybrid discretionary trust in the courts to establish a precedent for claiming interest.
The verdict was, on face value, good news; despite the discretionary powers of the trustee, there was sufficient nexus between the expected income and the actual expense to give the unit holder a deduction for their interest payments. This is also despite the trust not actually distributing any income for the period in question.
The tax office then wanted the courts to consider apportioning the interest, as the trust required only ordinary income (and not capital gains) to be distributed to the unit holder. However, the court dismissed that request as it was not included in the original tribunal hearing. So in looking at whether the interest was deductible in full, or not at all, the court ruled that it was entirely deductible.
We now expect that the tax office will try again with another case, with a focus on apportionment. The good news, though, is that the courts have determined that a trust can operate as both a fixed (ie, unit) and discretionary trust. And as such, unit holders may still have sufficient cause to claim interest on moneys borrowed to purchase units provided their trust deeds have been structured correctly.So, watch this space. It should be just a matter of time before the tax office have another go at this…