ATO flags negative geared deductions

The Australian Taxation Office (ATO) has warned taxpayers and self-managed super fund (SMSF) trustees to be careful when claiming deductions in relation to negatively geared trust arrangements.

Tax commissioner Michael D’Ascenzo said people needed to be cautious before claiming negative gearing deductions for borrowings used to fund interests in trusts with discretionary features.

“Before claiming such deductions, people should make sure the relevant expense is sufficiently connected to the income and capital gains they could reasonably expect to receive from their investments,” he said.

Under these trust arrangements, a taxpayer can use borrowed funds to acquire an interest in a trust, which then uses funds to purchase income producing property.

“These arrangements seek to provide income tax deductions to the taxpayer for all their interest payments, even though income or capital gains from the property may be derived by other beneficiaries of the trust, including SMSFs.”

According to D’Ascenzo, the ATO is not concerned with ‘hybrid arrangements’ but negatively geared trust arrangements, “which involve the taxpayer incurring expenses where all or a proportion of the borrowed funds could be used for the benefit of the beneficiaries, or where the taxpayer’s interest in the trust could be brought to an end before their costs if investments have been recouped”.