Discussion Questions...
Hi Julia and others,
I just read through most of the NTAA document.
Just a few points and questions regarding income units and negative gearing with property in HDT's, to help clarify my understandings:
- If you use this structure for tax benefit AND asset protection, and neither is your sole or dominant purpose (ie. you have multiple purposes), then doesn't that make it more legitimate?
- Further, with respect to asset protection, if you are self-employed or a business owner wouldn't this make it more legitimate, as asset protection in this instance may not be considered a 'private purpose'?
- Wouldn't the HDT would be more suited to a high income earner, who is self-employed or a business owner, at high risk of litigation, and is negatively gearing with property?
To elaborate on the above...
What I find confusing is how the ATO say that to be caught by part IVA, 'the sole or dominant purpose of entering into the arrangement must be to derive a tax benefit'. Then, if you say, no, you also want asset protection, the ATO says for the interest to be fully deductible, it must be 'incurred wholly for the purpose of producing assessable income'? And if they consider the asset protection of a 'private' nature, then you can't claim the FULL interest as a tax deduction?
Is the only way to get around this asset protection being classed 'private nature' if you are self-employed/business owner, or in a very high risk profession, or not just an employee of a large company?
- Instead of redeeming income units at cost price, if you redeem them at an appropriately calculated 'market value' for income units, wouldn't this be more appropriate? It will mean some CGT will be paid by the unit-holder (a smaller amount, but 100% of it), but, the the bulk of the capital gains on sale of the property, and after income units are redeemed, can still be streamed to beneficiaries?
- Could someone explain in simple terms what is the 'market value substitution rule'?
- If negative gearing benefits have been exhausted and units are redeemed, if you wait a 'reasonable' amount of time (?? > 12 months) BEFORE selling the property, then wouldn't this make this structure more legitimate?
- If there is a trust loss, then that trust loss can't be offset against future trust income, unless a family trust election is made, is that correct?
- What is the disadvantage of making a family trust election? Is it that there is an extra 'family trust distribution tax' payable? How much is this, how is it calculated? Is it so the trust can access imputation credits, which are important if it holds significant share assests? But, what if the shares are not negatively geared or there is no unitholder, but the trust buys the shares directly, so is acting like an ordinary discretionary trust?
- In simple terms, what exactly is the 'conservative' interpretation of the use of HDT's with respect to negative gearing IP's that the NTAA is suggesting. Or are they suggesting anything at all, apart from giving warnings and urging caution?
Julia, you mentioned you agreed with the conservative interpretation of the use of the HDT that the NTAA suggested, but from this document, I am not sure what it is? Are you able to elaborate on this?
- For those who currently use this arrangement, would it be fair to say that as long as you don't actually redeem units or sell the property at the current time, that claiming the full interest as a tax deduction is still justifiable? Wouldn't the tax deductions be disallowed only if you take the next step of unit redemption, selling the property, and discretionary capital gain/income distribution - which appears to be where the current contentions lie?
Thanks for any replies from anyone who wishes to shed light on the above questions...
GSJ
