Are all deeds the same? Or, alternatively, are deeds simply fungibles?

All deeds are not the same.  A deed to establish a discretionary trust is different to a deed to establish a unit trust.  A deed to establish a family trust is different to a deed to establish a superannuation fund.

Sometimes unit trust deeds have to be crafted for their particular purposes.  A vanilla unit trust deed may not provide the best land tax outcome for NSW land tax purposes.  A vanilla unit trust deed may not be the best form of a deed for SMSF investments, as the unit trust may not be a fixed trust for non-arm’s length income purposes.

A recent case has illustrated the downside of simply selecting a deed based solely on price.  The taxpayer wanted to invest in real estate and, for asset protection purposes, have the real estate held in trust for the taxpayer.  

The taxpayer acquired a discretionary trust deed.  This type of deed was used as it was the least expensive way of acquiring a trust deed.  The taxpayer wished to on lend to the trust borrowed money and also to claim a tax deduction for his interest expense.  The taxpayer was aware that he could not claim a deduction for the interest merely because he was one of the beneficiaries of the trust.  Consequently, the taxpayer had prepared a document which was signed by the trustee of the trust by which the trustee was bound to allocate all trust distributions to the taxpayer unless the taxpayer “renounced” the distributions.   This document was signed immediately after the trust deed was signed.

The taxpayer borrowed the money and on lent the borrowed money to the trustee of the discretionary trust.  The taxpayer claimed a deduction for these interest expenses and also received distributions from the trust.

The ATO challenged the taxpayer’s entitlement to claim deductions for the interest expense. The issue turned upon the nature and effect of the document which was signed after the trust was established.  In the AAT, the Tribunal held that the document was neither an effective amendment to the discretionary trust deed nor could it be treated as an effective exercise of the trustee’s discretion to allocate trust distributions to the taxpayer.  This finding by the Tribunal broke the nexus between the interest expense incurred by the taxpayer and the trust distributions.  In short, the taxpayer was not entitled to a deduction for the interest he incurred.

The decision does show that not all deeds are fungibles and sometimes deeds must be specially crafted for their intended purpose.  The result for the taxpayer would have been different if either the trust deed was not a discretionary trust deed or if the document which was signed after the trust was established did constitute a valid amendment to the trust deed.

Lambert v Commissioner of Taxation [2013] AATA 442