Estudio bacteriológico de diversas muestras clínicas.

Interest on debt often represents a large cost to businesses. In these tough economic times, it has become increasingly important to ensure that funding arrangements are structured appropriately with regard to claiming interest deductions. Whilst trusts have been in use in Australia by small and medium enterprises (SME’s) for many decades, the use of “hybrid trusts” has been under ATO scrutiny in recent times.

Deductibility of Interest

Interest is deductible to the extent to which it is incurred in gaining or producing assessable income or in carrying on a business for that purpose, provided that it is not of a capital, private or domestic nature.21Courts have traditionally looked towards the purpose of any borrowing and the use of the borrowed funds in determining the deductibility of interest.The nexus between expenditure incurred and assessable income also applies to other expenditures incurred in obtaining funding, such as bank guarantee and loan establishment fees.22

Taxation Determination 2009/17

In 2009, the Commissioner published Taxation Determination 2009/17 (TD 2009/17) in which he expressed his views on the deductibility of interest on funds borrowed to invest in trusts where beneficiaries have fixed and discretionary entitlements to income or capital. These arrangements are effectively describing what are commonly known as “hybrid trusts”.

TD 2009/17 examines the case when interest on borrowings is used to settle money on a trust to benefit both the borrower and other beneficiaries. The Commissioner’s view is that interest expense is only deductible to the borrower to the extent that it relates to the gaining or producing assessable income of the borrower. The Commissioner further states that, where the terms of the trust deed indicate that the borrowed money has been used to benefit both the borrower and other

beneficiaries, an apportionment calculation will be required to be completed to determine the extent of the borrower’s interest deduction.

Forrest Case

A deduction for interest used to borrow funds to invest in units in a hybrid trust was allowed by the Full Federal Court in Forrest v FC of T.23 Broadly, the background facts of the case are as follows:

 the taxpayer borrowed $4.5m to acquire units in a hybrid trust and claimed interest expenses in relation to this loan;

 the trust deed specified that income was to be distributed to unit holders and that capital gains were to be distributed to the discretionary beneficiaries at the discretion of the trustee; and

 clause 12 of the trust deed specified that the trustee had discretion to determine whether an amount was income or capital for the purpose of the trust.

In Forrest’s case, the terms of the deed were found by the Court to demonstrate that the trust was a fixed trust of income other than capital gains. It was not, in that respect a discretionary trust in relation to income.

In addition, the ATO stated in a decision impact statement issued in May 2010,24 that:

“Clause 12 which appeared to confer upon the trustee an unfettered discretion to determine whether a receipt was income or capital was no more than an administrative penalty to honestly classify receipts according to law.”

It followed that as the taxpayer had a fixed entitlement to the income of the trust, interest payments claimed by the taxpayer in relation to interest were deductible in full. The issue of apportionment was not considered by the Court in this case.

Lambert Case

In contrast to Forrest, the taxpayer in Lambert v FCT25 of T was denied deductions for interest on funds used to purchase investment properties.

The key facts in the case as are follows:

 the taxpayer established a discretionary trust and appointed himself as trustee of the trust;

 properties were purchased in the name of the Trust and loans were obtained by the taxpayer in his capacity as trustee of the trust to fund these property purchases;

 interest on these loans were claimed by the taxpayer in his personal income tax returns; and

 the taxpayer executed a variation to the trust deed, which specified that the taxpayer received the entire income of the trust until further notice was given to the trustee.

The two key issues considered by the Court in arriving at its decision were: firstly, whether the loans were obtained by the taxpayer as trustee of the trust or in his personal capacity and secondly, whether the variation to the trust deed effectively entitled the taxpayer to a fixed entitlement of income from the trust.

The taxpayer claimed that although the initial loan applications were made by the taxpayer in his capacity as the trustee of the trust, the intent was to borrow in his personal capacity and on lend the funds to the trust on an interest free basis. Accordingly, the taxpayer requested for the applications to be amended within months of the initial loan applications.

The Court held that although it was accepted that the taxpayer requested for the applications to be corrected, he had failed to ensure they were corrected by the bank until notice of amended

assessments were issued by the Commissioner.26 Therefore, the liability for interest payments fell on the taxpayer in his capacity of trustee of the trust and not in his personal capacity.

In reference to the second issue, it was held that the variation to the deed of settlement was void due to flaws in the execution of the deed of variation. In addition, the Court held that the deed of

24

Australian Taxation Office, ‘Decision Impact Statement’, 4 May 2010. 25

[2013] AATA 442. 26

In addition, the Court referred to s960-100, which provides that, “a legal person can have a number of different capabilities in which the person does things. In each of those capabilities, the person is taken to be a different entity.”

variation appeared to be executed solely for the benefit of the taxpayer, which does not conform to the fiduciary duty of a trustee to vary a deed to benefit beneficiaries as a whole.

In summary, the taxpayer had no more than an expectancy to receive income and was not presently entitled to income from the trust. Accordingly, the taxpayer was not entitled to deductions for the interest expenditure because there was insufficient nexus between the outgoings incurred and the derivation of assessable income.

ATO’s focus

In recent times, the ATO’s focus has been on “uncommercial trust arrangements” involving hybrid trusts. In particular, the focus in taxpayer alert TA 2008/3 has been on the use of hybrid trusts which are set up predominately to achieve negative gearing for high tax rate taxpayers while protecting the assets in the trust and are used to push profits to beneficiaries with a lower tax rate.

This is achieved by providing the beneficiaries of these trusts with discretionary entitlements to income and/or capital gains. The trustees of these trusts are also effectively controlled by the taxpayer and/ or their associates. The ATO has warned that there may be a denial of interest deductions for arrangements which possess the features highlighted in TA 2008/3, as these arrangements do not provide a sufficient connection between interest expenditure and the production of future income and / or capital gains.

The abovementioned cases and determination make certain that the issue of deductibility of interest will fundamentally depend on the facts of the case, and in particular, the terms of the trust deed. It is imperative that existing funding terms and trust deeds be reviewed by taxpayers and their advisors. Careful consideration should also be taken in the drafting of new funding arrangements and trust deeds.