The Tax Commissioner Attacks Home Loan Unit Trust Arrangements

The Tax Commissioner Attacks Home Loan Unit Trust Arrangements

The Commissioner of Taxation has recently issued a draft taxation ruling (TR 2002/D2) dealing with schemes where taxpayers purchase a residential property for private use through a unit trust.

A typical "Home Loan Unit Trust Arrangement" involves:

the taxpayer establishing a unit trust whereby the taxpayer is the trustee or a director of corporate trustee;
the trustee purchasing a residential property in the unit trust;
the taxpayer borrowing funds from a financial institution to subscribe for units in the trust;
the trustee uses the funds raised to complete the purchase of the residential property;
the trustee then leases the residential property to the taxpayer at market rent; and

the trustee collects rent and makes distributions in accordance with the taxpayer’s unit holdings.

Under such arrangements, the trustee is able to claim deductions for outgoings such as water, council rates, depreciation and other capital allowance deductions. The taxpayer also seeks to obtain a benefit of interest deductions against distributions received from the unit trust. In most cases, there is a significant disproportion between the amount of the distribution from the unit trust and the amount of interest expense on the funds borrowed to acquire the units in the unit trust.

The Commissioner claims that in such arrangements the interest is not deductible to the taxpayer as it is a loss or outgoing of a private nature. Furthermore, the Commissioner regards the arrangement as a tax-avoidance scheme whereby Part IVA of the Income Tax Assessment Act 1936 applies to deny the deductions of either or both the taxpayer and the trustee of the unit trust.