| In Australian taxation law there have been numerous | | | | interest by Mr Forrest and the receipt of assessable |
| cases that deal with the question of when interest, | | | | income from the trust. This was because any income |
| which is paid on borrowed money, is tax deductible. A | | | | that Mr Forrest would receive was at the discretion of |
| recent case, decided by the Full Federal Court, also | | | | the trustee. So, for example, Mr Forrest may never |
| dealt with this question in the situation of a hybrid trust. | | | | receive any income if the trustee always determined |
| A hybrid trust is one where there is a mixture of a | | | | that all of the amounts received by the trust were |
| discretionary component and a fixed component. If a | | | | capital. |
| trust is a discretionary trust (only) then the trustee has | | | | The taxpayer objected to the assessment and |
| the power to distribute the income and capital of the | | | | appealed to the Administrative Appeals Tribunal which |
| trust at the trustee's sole discretion to the beneficiaries | | | | agreed with the Commissioner's view and stated that |
| of the trust. A fixed trust (often a unit trust) is one | | | | the trust was a discretionary trust. The taxpayer then |
| where the income and capital flows, normally, to the | | | | appealed from that decision to the Full Federal Court. |
| unit holder beneficiaries in proportion to their unit holding. | | | | So, the matter was heard before three judges. |
| A hybrid trust is a mixture of the two. | | | | The Full Federal Court disagreed with both the |
| The case of Forrest v Commissioner of Taxation | | | | Commissioner and the Administrative Appeals Tribunal. |
| dealt with the issue of a unit holder of the trust (Mr | | | | The Full Federal Court said that the power of the |
| Forrest) borrowing $4.5 million to purchase units in the | | | | trustee to determine whether a receipt of the trust |
| trust. Mr Forrest then sought to deduct the interest that | | | | was either capital or income was not a power to |
| he paid on this debt. This was just over $860,000 over | | | | unilaterally decide that an amount was capital or |
| the course of three years. | | | | income without regard to the receipt's true nature. That |
| The Commissioner of Taxation argued that the | | | | is, an amount that was clearly income could not be |
| interest was not deductible because the way in which | | | | deemed by the trustee to be of a capital nature and |
| the trustee of the trust was required to determine | | | | directed away from the unit holders to the |
| what is income attributable to the unit holders and | | | | discretionary beneficiaries. This meant the power given |
| what is income attributable to the discretionary | | | | to the trustee in the trust deed to determine whether a |
| beneficiaries, was something that did not create a | | | | receipt was capital or income, was merely stating the |
| "present entitlement" for the unit holders, of which Mr | | | | power of the trustee to determine whether an amount |
| Forrest was one. The argument of the Commissioner | | | | was capital or income according to law and not an |
| was that the trust deed gave the trustee the power | | | | arbitrary power to say that a receipt was capital or |
| to determine what was capital and what was income | | | | income according to the opinion of the trustee. |
| for the purposes of the trust. Under the trust deed the | | | | This meant that, in the opinion of the Full Federal Court, |
| capital gains (both realised and unrealised) were to be | | | | any income receipts received by the trust were bound |
| distributed to the discretionary beneficiaries and all | | | | to be directed towards the unit holders in the trust. |
| other amounts were to be distributed to the unit | | | | Therefore there was a clear expectation that Mr |
| holders. Because the trustee had to make a decision | | | | Forrest would receive income in respect of the units |
| as to what amounts were capital and what amounts | | | | that he had purchased in the trust and, accordingly, the |
| were income, the Commissioner argued that there | | | | interest deductions were permitted. |
| was no clear connection between the incurring of the | | | | Wishing you easier business. |