Individual denied interest deduction
The Administrative Appeals Tribunal (AAT) has upheld the Commissioner's decision to disallow a taxpayer's claim for a personal deduction for interest and bank fees of over $120,000. These were incurred over a two-year period in relation to rental properties purchased by a family discretionary that had been set up for that purpose, and of which the taxpayer was the trustee. In arriving at its decision, the AAT found that objective evidence overwhelmingly disclosed that the bank lent the money to the taxpayer in his capacity as trustee for the trust, and not in his personal capacity (and that the taxpayer had not proved that the bank had been mistaken in relation to the legal character of the person to whom it had lent the money).
Furthermore, the AAT found that a variation to the trust deed made immediately after the trust had been established, which purported to make the taxpayer the sole beneficiary of all the rental income from the trust, was ineffective. The AAT therefore found that the taxpayer could not argue there was the relevant nexus between the interest and bank fee outgoings and the deriving of assessable rental income from the trust that would make the outgoings deductible. In particular, the AAT found that the deed of variation was not an effective exercise of the power to amend the trust deed as it was exercised solely for the taxpayer's benefit and without fulfilling the obligation to disclose details of the variation to the other beneficiaries of the trust.
In arriving at its decision, the AAT also noted that even if the distributions of rental income were properly made to the taxpayer pursuant to the relevant power in the trust deed, the taxpayer had no more than a "mere expectancy" of receiving rental trust income as he was not presently entitled to the income when the relevant expenditure was incurred. As a result, there was an insufficient nexus between the outgoings and the derivation of the assessable income.
The AAT also noted that Subdiv 960-E of the ITAA 1997 provides that a legal person can have a number of different capacities in which that person acts, and that in each of those capacities, the person is taken to be a different entity for the purposes of the tax law. Furthermore, in this regard, it found that the entity that had borrowed moneys from the bank was the trustee of the family trust and that the trustee’s status as borrower would not change, even if the taxpayer ceased to be the trustee at a later time. The AAT also commented that in the event it was wrong on this issue, the effect of the deed of variation created problems for the taxpayer, who was aware of the need to demonstrate that he had a present entitlement to the rental income from the trust in order to claim the relevant deductions.
Finally, the AAT found that it was not in a position to interfere with the Commissioner's imposition of 25% shortfall penalties for failing to take reasonable care. This was because the taxpayer had not complied with the requirements for objecting against the imposition of the penalties and, in particular, the requirement to state the grounds for their remission. As a result, the AAT concluded that without knowing the grounds on which the taxpayer intended to argue for remission of penalties, it could not embark upon such an enquiry itself (and that it would "not be fair" in the circumstances for it to make an order expanding the grounds stated in the notice of objection).
Re Lambert and FCT [2013] AATA 442, www.austlii.edu.au/au/cases/cth/AATA/2013/442.html.
