Meet the (HDT) Knockers!

Hybrid Trusts

GSJ

I have been in discussions with the ATO for the last 6 months concerning hybrid trusts and what is acceptable and what isn't acceptable. The ATO is about (next 6 to 12 months) to issue a statement concerning hybrids.

Suffice to say the majority of hybrids I put to the ATO were knocked back on the basis that the interest expense would either be apportioned or disallowed in full.

I stopped posting on the site as I was attacked by anonymous people representing the demtel salesforce in trust deeds. I will let Coasty Mike, Nick (Stavro) and Dale GG know the results of my discussions.

As for the Hybrid knockers I think they are entitled to their opinions and if there concerns can't be addressed then they probably have some good points.

Hybrids aren't for everyone or every situation. It's not like you can wrap it up in fancy wrapping paper, trademark it and claim it does more than it really does.

All the best.

Hi Chris,

Your contribution to this thread, and the forum as a whole, is very much appreciated.

Thanks!

Chris,
Thanks so much for being so upfront with us. I now know I can send people wanting Hybrids to you to get a straight answer. I think we all have the answer to our questions now. Talk to Chris and find out what the ATO are thinking about your particular circumstances. And if still in doubt wait the 6 to 12 months for the ATO to issue a ruling.

GSJ,

But, with the HDT you could argue that the CGT could be much less depending on your method of calculating the units redemption market value. Although, this does have its own problems as you have already mentioned.

Click to expand...

Regardless of how the capital gain is calculated if it is a gain then it is tax that would not have to be paid if the property was never transferred ie held in the high income earners name until he or she retired.

Alexlee,

Just be careful holding shares and a negatively geared property in a DT. The trust must make at least $1 in profit before it is allowed to distribute the franking credits from the shares to the beneficiaries.

Chris Batten said:

... Suffice to say the majority of hybrids I put to the ATO were knocked back on the basis that the interest expense would either be apportioned or disallowed in full....

Click to expand...

Thanks for that information Chris.

However unless I'm missing something here the above statement appears to paint a very bleak picture for those of us with HDTs!

Cheers - Gordon

Hybrid Trusts

Austini (aka Gordon)

Sorry, but I still don't know what to do about names on these things. Do I call Austini Gordon? Is Austini Gordon? I think Julia is Julia.

Anyway I think most people fall into 3 categories. Those who have hybrid trusts, those who are about to establish one and those who don't want one. The last group isn't relevant for what I am about to say. Also if you use one of the accountants I advise Nick (Stavro - I'll explain later), Mike and Dale then ignore this as these guys know whats going on and you should contact them first.

Group 1. I have a hybrid trust.

Wait approximately 2 to 3 weeks for my discussions with the ATO to finalise. I am not only talking to them about my clients and the way forward but also what could be done if someone has entered into a hybrid arrangement that isn't acceptable. If you could wait that long one of the three men named above will be able to help you. The ATO doesn't want to bash you over the head and take your money, unless you've been paying bogus invoices from Switzerland. I would suggest there will be an answer that will be relatively painless depending on the deed you have.

Group 2. I want to set up a hybrid trust

Wait approximately 2 to 3 weeks for my discussions with the ATO to finalise. Then once we know the acceptable parameters lodge an application for a Private Binding Ruling and get certainty before entering the arrangement. The ATO will tell you in advance whether they are going to allow your deduction in the form of a PBR.

In relation to group 1 I would still apply for a ruling after you have fixed up what the ATO doesn't like. That is if you have to fix anything. Your deed might be fine. I hear a lot of second guessing and comments that there exists insufficient court rulings on the topic. Recently the Full Federal Court abused the ATO for ignoring court decisions in relation to FBT and employee benefit trusts. The simple way is to get the ATO to say what you are doing is OK and that way you can sleep at night.

Trusts are a complex vehicle and even the Commissioner has problems coming to terms with some of the concepts. His attempt to address the section 97 problem in Practice Statement 2005/1 is a classic example. I'm not having a go at him, he did the best he could, the section needs to be drafted again taking into consideration the fact that capital gains was introduced.

Anyway my suggestion is to wait the 2 to 3 weeks and then make an informed and considered decision. If anyone, excluding people who deal with me, has a ruling on a hybrid I would be interested to see same. Also if anyone knows if someone has applied for a ruling for a PIT could you let me know.

All the best.

Bye the way evertime I go to post it says I am logged out when the first thing I did was log in. Should I get my 7 year old son to post my comments?

Chris,

Thanks for your advice, I hope you will keep us posted. I may need the remedial version, what is a PIT?

Julia (Julia)

Hi again Chris,

Thanks for the further information.

I use your HDT deed and have harrassed poor Dale/James just moments ago in relation to this. I'm eager to see what the outcome is in relation to redemption of income units in addition to interest deductions. We were hoping to redeem income units in the not too distant future and subsequently sell the property in 5 or so years and certainly prior to retirement. So the treatment of CGT when redeeming units is a concern. It seems that CGT may be payable twice (albeit calculated differently) under this scenario?

I will patiently wait for a few more weeks as suggested.

Many thanks - Gordon (my real name)

julia said:

Chris,

Thanks for your advice, I hope you will keep us posted. I may need the remedial version, what is a PIT?

Julia (Julia)

Click to expand...

PIT bull terrier! Sorry only joking.

A PIT is Ed Chan's "Property Investors Trust". If you do a search this has been discussed in detail previously here.

Cheers - Gordon

Hi,

Thanks Chris Batten for your reply.

Your comment below is reassuring for those with HDT's, particularly I suspect those using your deeds:

I would suggest there will be an answer that will be relatively painless depending on the deed you have...C.Batten

Click to expand...

Nonetheless, it may be an anxious 2-3 week wait for some here.

I suspect those who have entered into the PIT arrangement may have more to be worried about...

Thanks,

GSJ

Chris Batten said:

Bye the way evertime I go to post it says I am logged out when the first thing I did was log in. Should I get my 7 year old son to post my comments?

Click to expand...

When you have a longer post, type it out in Word, and paste the response.

Thank you very much for your valuable information.

Please keep us updated here also Chris.

I belong to group number 4 at this stage.

I have a HDT set up by one of the guys you listed, but I am using a different accountant to lodge my tax returns since the set up.

Cheers
mono

Chris Batten said:

Bye the way evertime I go to post it says I am logged out when the first thing I did was log in. Should I get my 7 year old son to post my comments?

Click to expand...

Probably.

Also, just make sure you have ticked the 'Remember Me' box when you log on and you wont have the problem.

monoply said:

Please keep us updated here also Chris.

I belong to group number 4 at this stage.

I have a HDT set up by one of the guys you listed, but I am using a different accountant to lodge my tax returns since the set up.

Cheers
mono

Click to expand...

Hi, I'm in the same boat as mono and would really appreciate any updates via this forum.

Cheers
Ebbie.

julia said:

Alexlee,

Just be careful holding shares and a negatively geared property in a DT. The trust must make at least $1 in profit before it is allowed to distribute the franking credits from the shares to the beneficiaries.

Click to expand...

I think I'm going to use two DTs (or, as GSJ suggested, one DT and one HDT with no units issued). Keep the -vely geared property in one, and shares in the other.

Say I have shares in a DT that has $700 in franked dividends + $300 franking credits. Am I able to distribute franking credits to one beneficiary and the dividends to another beneficiary? Or do I have to follow the same franking %?

Also, in the above example if I distribute $1,000 to another trust that has a net loss position, can the trust get a refund for imputation credits?
Alex

Alexlee,

Are your trust residents of Australia for tax purposes?

julia said:

Alexlee,

Are your trust residents of Australia for tax purposes?

Click to expand...

It will be, and so will I when I set up the trust (I'm going to do this after I come back to Australia to live permanently). I'm an Australian citizen, will be living in oz and my family will all file oz tax returns, etc.

I know that there are lots more issues if the trust or beneficiaries are non-res. In my case, when I set this up everything will be resident in Oz.
Alex

RE: ATO Ruling

I thought this might be of interest to the current discussion. Some of you may have already seen it.

This ATO ruling relates to the interest deductibility on a loan to purchase units in a unit/Hybrid trust.
http://www.ato.gov.au/rba/content.asp?doc=/rba/content/28993.htm

That's the one NickM lodged.

Here's the kicker - "The rental property will be a residential property. A rental agreement will be entered into between the Unit Discretionary Trust and a Company providing serviced accommodation. The rental agreement for the property will be for a period of 10 years.

The Company will be responsible for finding tenants for the property and all day to day operations of the property. The level of rental income will be set by the Company independently of the Unit Discretionary Trust, as owner of the property. Any income derived from the Company will be distributed to the unit holder after allowing for the deductible expenses of the trust."

So if you want this to work, you have to have an additional company and a 10 year agreement as described above.