The Australian Taxation Office (ATO) has released a Taxation Determination which considers the deductibility of interest expenses incurred by a beneficiary of a discretionary trust where borrowed money has been on-lent to the trust on interest-free terms. The Determination was previously released in draft form.

The Determination confirms that, in most cases, the beneficiary will NOT be entitled to interest deductions for funds on-lent interest free.

The Determination does identify some very limited situations where interest deductions may be available. However, these situations are not likely to be encountered in practice.

This Determination also confirms that the trustee cannot pass any early trust distribution resolution (or a ‘future year’ distribution resolution) to create present entitlement to trust income for the beneficiaries in a manner that would create a nexus for the deduction of interest expenses.

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