Deducting interest on borrowings on-lent to discretionary trust

The Commissioner considers that a beneficiary of a discretionary trust who borrows money, and on-lends all or part of that money to the trustee of the discretionary trust interest-free, is usually not entitled to a deduction for any interest expenditure incurred by the beneficiary in relation to the borrowed money on-lent to the trustee under s 8-1 of ITAA 1997.

It is only where:

  • the beneficiary is presently entitled to income of the trust estate at the time the expense is incurred, and
  • the expense has a nexus with the income to which the beneficiary is presently entitled that some part of the interest expense might be deductible.

Even then, the interest expense is likely to have been incurred in the pursuit of one or more objectives other than the derivation of assessable income by the beneficiary and will not be deductible to the extent of any non-income producing objective/s.

An irrevocable resolution made by a trustee of a discretionary trust to exercise a power of appointment of income in favour of a beneficiary does not confer present entitlement to income of the trust estate on that beneficiary until such time as the income is received by the trustee and is legally available for distribution.

A resolution made towards the beginning of the income year (an “early resolution”) by the trustee of a discretionary trust is not ordinarily effective to make a beneficiary presently entitled to income of the trust estate at that time, given the uncertainty as to whether any distributable income will exist for the year.

To find out more about any assessable income derived, or anticipated to be derived, in respect of a future year, come and speak to us Tax Ideas Accountants & Advisers   Tel: (02) 8318 1545




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