The ATO confirms its long-standing view that when a beneficiary of a discretionary trust borrows money and on-lends all or part of that money to the trust on an interest-free basis they are not usually entitled to a deduction under section 8-1 ITAA 1997 for the interest expenses accruing on the money they borrowed. This is because there is not generally a sufficient connection between the interest expenses incurred by the beneficiary and the derivation of their assessable income.
The TD provides that some part of the interest expense might be deductible in circumstances where:
- a) The beneficiary is presently entitled to income of the trust estate at the time the interest expense is incurred; and
- b) The expense has a nexus with the income to which the beneficiary is presently entitled.
However, the ATO notes that even if the above criteria are satisfied, 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 they would often only be able to claim a partial deduction for the interest expense.
The ATO also notes that even if a trustee makes a resolution to appoint income to a beneficiary early in the income year (e.g., July), the beneficiary is not presently entitled to the income until it has actually been received by the trust, which may make it difficult for the beneficiary to show that they were made presently entitled to the income at the time the interest expense was incurred.
The TD notes that similar principles would apply to other expenses incurred by beneficiaries of a discretionary trust such as motor vehicle expenses.
Unfortunately the ATO does not provide specific guidance on the tax treatment in situations where the beneficiary charges interest on the loan to the trust and the steps the ATO expects beneficiaries to take to ensure that a full deduction is available for their interest expenses.
To find out more about the lending criteria about discretionary trusts, come and speak to us Tax Ideas Accountants & Advisers…https://taxideas.com.au/booking/ Tel: (02) 8318 1545