The general rule is that interest on borrowings used to purchase the family home is non-deductible.
An exception to this is where a discretionary trust purchases a home with bank finance and rents it to family members at a commercial rent. If the interest and other expenses exceed the rental income then tax losses will be created and the property will be negatively geared.
This strategy will be attractive where the trust has other income to absorb the rental loss.
For this strategy to be successful it is essential that:
- Commercial arms-length rent must be paid.
- A lease should be signed and subject to normal commercial arms-length terms i.e. bond paid, etc.
- The dominant purpose of having the negatively geared family home in the trust is for asset protection purposes, not tax savings.
The above strategy was confirmed by the ATO in the Janmor Nominees Pty Ltd case.
The advantages of the above strategy include:
- Asset protection – The family home is owned by a trust and not family members. This is attractive for high risk professionals such as doctors, solicitor, business owners, etc.
- The rental property is initially negatively geared in the trust, so there will be tax savings available to the trust if it has other income.