Case V109

P Gerber DP

Administrative Appeals Tribunal

Decision date: 11 July 1988.

Dr P. Gerber (Deputy President)

In this case the taxpayer together with her husband (henceforth referred to as H and W) are the trustees of the John Maynard Keynes Family Trust. It is a discretionary trust, allowing the trustees to accumulate the income in any one year, or to hold it ``upon trust absolutely for the beneficiaries or any one or more of them exclusive of the other or others of them in such shares and proportions as the trustee(s) shall in (their) absolute discretion effectively determine prior to the thirtieth day of June in (any) year...''. The primary beneficiaries of the trust are H and W and ``any child or adopted child of H and W''. To complete the factual background, H and W borrowed money to buy a farming property - Blackacre - which they proceeded to run jointly as trustees for the family trust, incurring business expenditures along the way. There is no lease agreement in place between the couple and the trust, nor any other mechanism (such as a unit trust) which would enable them to demonstrate a legal entitlement to income from their farming activities.

2. In the year now under review (1983), the following claims for deduction were made in the personal return of W:

A.B. & C.D. Keynes

      Expenses                           $
      Loan Charges $770 2nd Year      154.00
      Interest - C.D.B.A.           7,484.14
               - Adam Smith        16,746.00
      Travelling Expenses             408.00
      Depreciation                 17,745.00
      Papers & Journals               120.00
      Bank Fees C.D.B.                107.25
            Half share each $21,382.20

3. I am unable to perceive how, in the circumstances outlined above, any of the claimed outgoings can be seen as having the necessary nexus with the derivation of W's assessable income. All she can show is that she had a contingent right to a share of income from the trust. At no time, when the impugned expenditures were incurred, could she demonstrate a present entitlement to any income from the trust estate. What the taxpayer is seeking to do is to deduct outgoings incurred in the business of farming, a business carried on, not on her own behalf, but as trustee for and on behalf of certain beneficiaries (including herself). That is not enough. For better or worse, this taxpayer is involved in a dual relationship for tax purposes, wearing two hats. Wearing her own hat, she cannot show that her share of the impugned expenditures were outgoings incurred in producing her assessable income, or were necessarily incurred in carrying on the farming business for the purpose of producing such income.

4. In the events that occurred, there was in fact a distribution from the trust in that year, which resulted in the taxpayer receiving $23,275, her husband $12,080, and $1,040 was paid to each of three eligible children. However, in my view, expenditures voluntarily incurred on behalf of a business which is carried on, not in the taxpayer's individual capacity, but on behalf of certain beneficiaries, do not become deductible on proof that income was actually received. In these circumstances, this claim cannot succeed.

5. In case I am wrong and the matter goes on appeal, I make the following findings of fact:

  • (i) No sufficient evidence has been adduced to establish outgoings on ``papers and journals'' or travelling expenses;
  • (ii) the loan charges were incurred and appropriately calculated pursuant to sec. 67(2) of the Tax Act and are otherwise allowable under sec. 67(1);
  • (iii) interest charges and bank fees were incurred in 1983 as claimed by H and W, and would, but for the failure to ensure a present entitlement to income from the trust, be an allowable deduction;
  • (iv) depreciation with respect to plant and equipment would have been an allowable deduction but for an inability to demonstrate that the plant was used for the purpose of producing assessable income.

6. For the above reasons, I would affirm the Commissioner's decision on the objection.

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