The Full Federal Court has held that a taxpayer was entitled to a deduction for interest incurred on a loan taken out to acquire units in a hybrid trust.
It's an interesting case because the taxpayer's units entitled him to ordinary income of the trust, but capital gains could be distributed to other beneficiaries on a discretionary basis.
The technical details related to certain standard clauses in the deed (and in most hybrid trust deeds) granting the trustee the power to decide whether amounts received should be considered to be derived on income or capital account.
The Tax Office alleged that power made the deed a discretionary trust, meaning that the taxpayer would not be able to claim interest on the loan he took out to buy the units.
The Court rejected the ATO's assertions and allowed the taxpayer to claim the interest as the power in the deed merely allowed the trustee to allocate amounts between income and capital.
Source: AFA (www.activefa.com)
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