Deductions – items 16 to 20

16 Deductions relating to Australian investment income and franked distributions

If the trust was paid a dividend by a LIC directly and the dividend included a LIC capital gain amount, the trust can claim a deduction of 50% of the LIC capital gain amount. If the LIC dividend is franked (either fully or partially) then print at label R Deductions relating to: Franked distributions any deduction relating to a LIC capital gain. If the LIC dividend is unfranked, then print at label P Deductions relating to: Australian investment income any deduction relating to the LIC capital gain. The LIC’s dividend advice statement shows the LIC capital gain amount.

Include expenses that are directly related to franked distributions which are derived by the trust directly (rather than through another trust or partnership) at label R. These deductions should not include deductions shown at item 8 Partnerships and trusts – label F Franked distributions from trusts. Expenses related to unfranked distributions are shown at label P.

Expenses listed here that are costs associated with borrowing and servicing debt may not be allowable deductions under the thin capitalisation rules; see Appendix 3. The disallowed amount reduces the amount that would otherwise go at label P or R.

Deductions for the decline in value of depreciating assets used to earn interest and dividends are generally shown at label P or R. However, if the trust has allocated some of these assets to a low-value pool, you may need to include deductions at item 18 Other deductions – label Q. For more information, see Appendix 6.

If the TOFA rules apply to the trust, include all deductions relating to Australian investment income from financial arrangements subject to the TOFA rules at label P or R.

Former STS taxpayers still using the STS accounting method

If the trust is eligible and has chosen to continue using the STS accounting method, it can claim general deductions (for example, interest expense) only when they are paid. For more information on the STS accounting method, see Appendix 13.

17 Forestry managed investment scheme deduction

Print at label D Forestry managed investment scheme deduction the total amount of deductible payments made to an FMIS.

A trust may be entitled to claim a deduction at this item for payments made to an FMIS if:

• the trust currently holds a forestry interest in an FMIS, or held a forestry interest in an FMIS during 2022–23
• the trust paid an amount to a forestry manager of an FMIS under a formal agreement
• the forestry manager has advised the trust that the FMIS satisfies the 70% direct forestry expenditure rule in Division 394 of the ITAA 1997
• the trust does not have day to day control over the operation of the scheme
• there is more than one participant in the scheme, or the forestry manager or an associate of the forestry manager manages, arranges or promotes similar schemes, and
• the trees are established within 18 months of the end of the income year in which an amount is first paid under the FMIS by a participant in the scheme.

If the trust is an initial participant in an FMIS it can claim initial and ongoing payments at this item. The trust cannot claim a deduction if it has disposed of its forestry interest in an FMIS within 4 years after the end of the income year in which it first made a payment. However, the deduction will be allowed if the disposal occurs because of circumstances outside of the trustee's control, provided the trustee could not have reasonably foreseen the disposal happening when they acquired the interest. Disposals that would generally be outside the trustee's control may include compulsory acquisition, insolvency of the trust or the scheme manager, or cancellation of the interest due to fire, flood or drought.

If the trust is a subsequent participant, it cannot claim a deduction for the amount paid for acquiring the interest. The trust can only claim a deduction for ongoing payments. The deduction is claimed in the income year in which the payment is made.

Relevant terms are explained at item 10 Forestry managed investment scheme income.

Excluded payments

The trust cannot claim a deduction at this item for any of the following payments (see section 394-10 and section 394-40 of the ITAA 1997):

• payments for borrowing money
• interest and payments in the nature of interest (such as a premium on repayment or redemption of a security, or a discount of a bill or bond)
• payments of stamp duty
• payments of GST
• payments that relate to transportation and handling of felled trees after the earliest of the following        
  • sale of the trees
  • arrival of the trees at the mill door
  • arrival of the trees at the port
  • arrival of the trees at the place of processing (other than where processing happens in-field)
• payments that relate to processing
• payments that relate to stockpiling (other than in-field stockpiling)
• payments that relate to marketing and sale of forestry produce.

The trust may claim a deduction for some of these expenses at another item.

18 Other deductions

Print at label Q Other deductions any deductible losses and outgoings not already claimed by the trust at any other items. The following are some examples of the amounts to be included at label Q:

• Former STS taxpayers still using the STS accounting method
• Losses and outgoings
• Interest expenses
• Tax-related expenses
• Losses on the disposal of traditional securities
• TOFA amounts from financial arrangements
• Payment of premiums to a non-resident insurer
• Gifts
• Deductions for political contributions and gifts
• Subscriptions
• Deductions for depreciating assets in a low-value pool
• Film industry incentives

If the trust is registered for GST, exclude any input tax credit entitlements for expenses incurred by the trust from the amount recorded at label Q.

Former STS taxpayers still using the STS accounting method

If the trust is eligible and has chosen to continue using the STS accounting method, it can claim deductions for the following expenses only when they are paid:

• general deductions, for example interest expense
• tax-related expenses
• expenses for repairs.

For more information on the STS accounting method, see Appendix 13.

Losses and outgoings

You can claim a deduction for losses and outgoings if they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing such income.

However, under section 25–90 of the ITAA 1997, a trust may be able to claim a deduction for costs incurred in obtaining or servicing debt interests (as defined in ITAA 1997) if the costs are incurred in earning foreign source income which is non-assessable non-exempt income under section 768-5 of the ITAA 1997, section 23AI or 23AK of the ITAA 1936. The amount of the deduction is subject to any reduction required by the thin capitalisation rules. Similar rules apply under subsection 230-15(3) of the ITAA 1997 in relation to your debt interest that is a financial arrangement covered by the TOFA rules.

Debt deductions (such as interest and borrowing costs) incurred in earning assessable foreign source income that are not attributable to an overseas permanent establishment of the taxpayer should be included at label Q. You can deduct these expenses against assessable income of the trust, subject to any reduction required under the thin capitalisation rules. Do not include them in the calculation of the net foreign source income at item 23 Other assessable foreign source income – label V Net or any other item.

You cannot claim a deduction for the following:

• losses or outgoings of capital or of a capital, private or domestic nature, except where special provision is made in the income tax law
• expenses incurred in gaining or producing exempt or non-assessable non-exempt income – except certain debt deductions under section 25–90 or subsection 230-15(3) of the ITAA 1997
• penalties or fines
• income tax liabilities
• entertainment, except in very limited circumstances
• costs associated with borrowing and servicing debt to the extent that a deduction is denied under the thin capitalisation rules.

For more information on thin capitalisation, see Appendix 3. The disallowed amount reduces the amount that would otherwise be shown in label Q.

Interest expenses

If a trustee borrows money to pay distributions to a beneficiary, the trustee will only be able to take into account the interest expenses incurred on those borrowed funds when calculating the net income of a trust estate in certain circumstances; see TR 2005/12 Income tax: deductibility of interest expenses incurred by trustees on funds borrowed in connection with the payment of distributions to beneficiaries.

In order to be deductible, the interest expense must be sufficiently connected with the assessable income earning activity of the trust. There will be sufficient connection if the purpose of the trustee borrowing funds is to refinance a returnable amount. Trustees who have incurred interest expenses on monies borrowed to pay distributions to beneficiaries should seek advice either from their professional advisers or from us.

Tax-related expenses

Print at label Q any expenses incurred by the trust in the management of its tax affairs. These expenses include:

• the cost of attending an audit by us
• tax planning
• expenditure on your income tax affairs, that is, a fee or commission for professional advice where the advice is provided by a registered tax agent, a barrister or solicitor
• an interest charge imposed by us on taxes and penalties
• a penalty for underestimating a varied GST instalment or PAYG instalment.

Show a deduction for the decline in value of a depreciating asset used in managing the tax affairs of the trust at label Q. For more information on working out decline in value, see Appendix 6.

You cannot claim a deduction for costs for any offence-related matter, for example, the cost of defending a tax prosecution.

If expenditure allowed or allowable as a deduction is recouped, include the amount recouped in assessable income in the year of recoupment.

Losses on the disposal of traditional securities

Print at label Q any non-capital losses incurred upon the disposal or redemption of a traditional security which are deductible under section 70B of the ITAA 1936. For more information on gains and losses on traditional securities, including traditional securities that are convertible notes or exchangeable notes, see You and your shares 2023.

TOFA amounts from financial arrangements

If the TOFA rules apply to calculate an assessable gain or deductible loss on the trust’s financial arrangements, include at this item those deductible losses relating to the financial arrangements.

TOFA amounts that have been included elsewhere should not be included here, for example amounts that have already been included at:

• item 5 Business income and expenses – label S Net income or loss from business
• item 9 Rent – label G Interest deductions.

If what you show at label Q or any other deduction item includes an amount which is brought to account under the TOFA rules, complete item 31 Taxation of financial arrangements (TOFA).

Payment of premiums to a non-resident insurer

You can only claim a deduction for insurance premiums paid to a non-resident insurer for the insurance of property situated in Australia or of an event which can happen only in Australia where:

• the premium would otherwise be deductible to the trust
• arrangements have been made to our satisfaction for the payment of any tax payable or which may become payable in relation to the premium.

Keep records of the details supporting any claim for a deduction.

Gifts

Print at label Q the deduction for gifts to DGRs. The deduction cannot add to or create a tax loss. You may need to reduce the claim where the amount at item 20 Net Australian income or loss is a loss.

In some trusts, the trustee may have the power to make gifts or donations from the trust fund.

The trust can only claim a deduction for gifts (including cash) made to an organisation which is a deductible gift recipient (DGR). DGRs are endorsed by us or specifically named in income tax law. Some of the types of bodies that can be endorsed as DGRs are public benevolent institutions, school building funds and approved overseas aid funds.

To check whether the organisation is a DGR, go to ABN LookupExternal Link.

Gifts of $2 or more of certain property, or money, may be deductible. This includes gifts of property that we value at more than $5,000, and property purchased by the donor during the 12 months before the gift was made, and shares valued at $5,000 or less acquired in an Australian publicly listed company at least 12 months before the gift was made.

If claiming a donation for property that we value at more than $5,000, or under the Cultural Gifts Program, or to National Trust bodies, keep the required valuation certificates.

A trust may elect to spread deductions over 5 income years or less, where the gift is money, or property that we value at more than $5,000. Special requirements apply for spreading deductions for certain environmental, heritage and cultural property gifts.

For more information, see Receiving tax-deductible gifts.

Deductions for political contributions and gifts

Only individuals can deduct contributions and gifts to political parties and independent members and candidates; and the individual claiming the deduction must not have made the gift or contribution in the course of carrying on a business.

Subscriptions

Print at label Q any expenses incurred for subscriptions paid to:

• trade, business or professional associations
• other organisations where the subscription expense is incurred in producing assessable income
• journals or magazines related to producing assessable income.

Do not claim for fees paid for membership of a sporting or social club, or a political party.

Deductions for depreciating assets in a low-value pool

If the trust has allocated depreciating assets used for different income-producing purposes to its low-value pool (for example, some assets are used for producing rental income, or carrying on a business) and it has not shown them at any other item, show the low-value pool deduction at label Q.

For more information, see Appendix 6.

Film industry incentives

The conditions under which concessions are available for the Australian film industry are explained in Film industry incentives 2023.

19 Total of items 16 to 18

Print at item 19 Total of items 16 to 18 the total deductions relating to Australian income.

20 Net Australian income or loss

Print at item 20 Net Australian income or loss the net income or loss relating to Australian income, that is, total Australian income, minus total deductions. If this amount is a loss, print L in the box at the right of the amount.

Continue to: Capital gains – item 21