Another Blow to Hybrids

[DaleGG]

hi Cliff

There is no such thing as 100% certainty with anything when it comes to tax.....even the tax office have turned face and argued against their own public rulings in the past!!

However, to put this issue to bed, I have spoken to Chris Batten this morning and offered to personally seek a declaratory order from the courts (similar to a PBR) and in doing so....put my money where my mouth is.

It seems that nothing else will be good enough for some people......

I believe that this takes a little time and I am happy to share the results when I get them. I am now just waiting on Chris to come back to me with how we go about this.

Dale

Yes

Dale I think your last post really doesn't adress the reality of how the legal system works in Australia.

there have been situations in the past where large groups of people have participated in what many considered to be acceptable schemes only to get a nasty fright and a painfull bill.

There are many shades of grey between black and white.

Maybe Chris Battern is in a situation where he can define what the Tax Department will do , but if as you say , he knows more than them , maybe the ATO will make the incorrect decision if they don't " know enough " .

Maybe the Judges who would have to adjudicate in the decision between whether Chris or the ATO know more ( if it ever came to that ) also don't know as much.

How many times have we seen land mark legal decisions decided by split decisions amongst the leading legal minds in the country.

Can you 100% guarantee HDT's will hold up ? Maybe on the balance of probablities they will but what degree of certainty can be offered at the moment.

Cliff

 

[see_change]

hi Cliff

There is no such thing as 100% certainty with anything when it comes to tax.....even the tax office have turned face and argued against their own public rulings in the past!!

However, to put this issue to bed, I have spoken to Chris Batten this morning and offered to personally seek a declaratory order from the courts (similar to a PBR) and in doing so....put my money where my mouth is.

It seems that nothing else will be good enough for some people......

I believe that this takes a little time and I am happy to share the results when I get them. I am now just waiting on Chris to come back to me with how we go about this.

Dale

Sounds like a great idea Dale

CLiff

 

[Mry]

Would there be any shortcomings with that approach Dale? Such as the application of Part IVA and the Commissioner's views from IT 2864?

 

[DaleGG]

Hi Mry

This approach can really only go one of two ways. The court will either find that the HDT that I use, and the way that i use it, is consistent with the law or it will find that it is not.

If it is consistent, then, I will have proven once for all hopefully, that a good HDT trust deed, used properly, is appropriate for investors.

If it is not consistent, then I will personally be out of pocket for not only the court costs, but, also the legal representation. Moreover, I will need to refund any taxes that I will have saved through using the trust structure. So, yes, I am personally at risk.

I cannot think of any other way to prove my confidence in the structure and the trust deeds; and to stop this mindless waffle started by those that are incapable of thinking for themselves and that undermines this situation and the good people who use the structure for all the right reasons.

I am waiting to talk to Chris Batten or Chris Balalovski about how we do this properly. I will keep everyone informed and just ask for a little patience as the tax office and the court system moves slowly.....

Dale

Would there be any shortcomings with that approach Dale? Such as the application of Part IVA and the Commissioner's views from IT 2864?

 

[julia]

GSJ –
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?

Because of PBR 28993 I had to admit there was some merit in HDTs much as they worried me as the dominant reason seemed to be a tax benefit once you got to the stage that the discretionary beneficiaries started to receive distributions. So I considered my view to be conservative in that I couldn’t argue against the negative gearing of the units because of PBR 28993 but was not confident of the out come once the trust moved into the next stage. Clients can be very determined to set up a HDT so my official approach was that I could not argue flatly against them but had my hesitations so would prefer the client to see a tax lawyer to set one up rather than recommend them myself. Fortunately, in every case I managed to talk my clients out of setting up a HDT because I could always find a way of achieving what they wanted in the HDT with a more proven method. For example if they are a wage earner, using the Salary sacrifice kit. If it is positively geared, using a DT or holding in the name of a low income spouse. If they are in business, directing profits from the business into a DT that holds the negative geared property. If they are a high risk wage earner using the Salary sacrifice kit with 1% ownership to the spouse at high risk. If they are a high risk single person look at ways to build super etc.

I think it is unfair to say I should stand my ground and stick by what I believe in. I don’t see that as my roll at all I see that it is my job to keep abreast of these issues, keep on reading and learning. And I don’t see that I have necessarily changed my mind I just now have a stronger foundation for my concerns because of PBR 66298. But I have changed some of what I am saying to people. Before if they really wanted a HDT I would tell them to see a tax lawyer because I had concerns about how far you could go with them and then talk about the other options available. Now I would have to say, stay away from HDTs PBR 66298 takes the issue further than PBR 28993 in that it looks at the whole life of the trust, by doing this it appears to contradict PBR 28993 but really it is just clearly discusses the stage of distributing to discretionary beneficiaries. The ATO with perfect hindsight can say the whole arrangement was not intended to make a profit for the unit holders refer TR 95/33 and Fletchers case. Then I would still do what I have always done, find something safer that achieves the same effect.
I am very relieved the ATO has issued PBR 66298 as there was a lot of pressure on accountants to get with the times, everyone is doing it. Now I have something I can refer to, to counter PBR 28993 that even uses the word Hybrid. I know it is not binding but it was needed considering PBR 28993.
As for who is right or more to the case who will win in the courts. Depends a lot on the judge. There have been periods when the courts are lenient re tax and times when they have been hard. If the law was so clear that it couldn’t be influenced by the attitude of the judge there would be no need to go to court in the first place.
The NTAA NOW don’t mind hybrids if they are used to give staff etc outside the business units so they have some entitlement to profit share yet the family still has the advantages of a DT. They feel that if the Units are not negatively geared it will be alright but then they list a reasons the problems associated with this type of set up. Again I feel there are other ways to achieve this without using a Hybrid.

 

[julia]

Mry,

I went to the NTAA seminar the month before the one you went to. When I asked him Matthew said that TR 95/33 and Fletchers case was a concern but what could he do if clients demand a HDT all he was doing was providing us with what he considered the best deed.
How did he come across at the one you went to? Was he saying it would work or did he tell people of the risks?
For other readers Matthew is not part of the NTAA he just asked if he could address the seminar for a few minutes to show the accountants in the audience how his hybrid works.

 

[Mry]

How did he come across at the one you went to? Was he saying it would work or did he tell people of the risks?

For those reading, Matthew Burgess is a partner at McCullough Robertson lawyers.

He called their interpretation a "conservative position on an aggressive product", being one where the unit holder made a decision when a property could be sold. As for how he came across....he will probably read this...oh well, he was a bit wishy washy at the start, and I wished he would have spent more time on the shortcomings of the approach but ended quite solidly. I was really hoping for a "well, the ATO says this about negative gearing on HDTs but our opinion is ...." but I didn't get that.

I'll send you some information I received from another accountant about some opinions on HDTs from an accounting group later. Very long and sort of funny actually.

 

[JIT]

Now I would have to say, stay away from HDTs PBR 66298 takes the issue further than PBR 28993 in that it looks at the whole life of the trust, by doing this it appears to contradict PBR 28993 but really it is just clearly discusses the stage of distributing to discretionary beneficiaries.

Thanks for your reply Julia. I think the counter-argument against PBR 66298 is that the trust deed in this case was not appropriately worded, which I think Dale had suggested earlier.

Are these the only two PBR's on HDT's???

GSJ

 

[see_change]

Gee, all this talk of PBR's made me go an pick up a bottle of Private Bin Vat 47

Cliff

 

[julia]

GSJ -
Thanks for your reply Julia. I think the counter-argument against PBR 66298 is that the trust deed in this case was not appropriately worded, which I think Dale had suggested earlier.

This is a direction I wanted to head in earlier. Does anyone have a trust deed that is different from PBR 66298 that they think will over come the problems and what is that difference?

 

[JIT]

With all this discussion about HDT's, I really wonder about the PIT, and how confident its creators are about its legitimacy as an investment structure and what they are doing to make sure it is all OK with the ATO??? I recall something from previous discussions about diverting income to beneficiaries, even before the property becomes positively geared...

GSJ

 

[geoffw]

If they are in business, directing profits from the business into a DT that holds the negative geared property.

I have trouble understanding a lot of stuff about HDTs. I haven't had one, because the single property which ws eligible for DTs (the flock of bats) was positively geared from the start. Well, actually, with depreciation, probably not.

I did get into a DT for that property because of Dale's suggestions about the benefits of such a structure.

Without giving away too many details, I know that Dale was able to direct profits from one positive trust into a negative- a possibility which I was not aware of at all before.

I'm not taking sides in an inconclusive debate- indeed, I'm worried about the tone which is coming from both sides of the argument- I am only suggesting that Dale has not precluded going down other paths other than HDTs.

 

[julia]

Dale -
I am waiting to talk to Chris Batten or Chris Balalovski about how we do this properly. I will keep everyone informed and just ask for a little patience as the tax office and the court system moves slowly.....

Does this mean we won't have an answer we can rely on in a matter of weeks?

 

[NigelW]

Yes

Dale I think your last post really doesn't adress the reality of how the legal system works in Australia.

there have been situations in the past where large groups of people have participated in what many considered to be acceptable schemes only to get a nasty fright and a painfull bill.

There are many shades of grey between black and white.

Cliff

Seech

Did those investors invest in schemes with ATO Product Rulings? Or if they did were the schemes run in accordance with said rulings?

A product ruling is a type of public ruling under the provisions contained in Part IVAAA of the Taxation Administration Act 1953. Each product ruling is made in relation to a class of persons – those who invest in the product – on specified tax laws (that is, a section or other provision under which tax liability is worked out), and in relation to a specified arrangement (all the details, agreements constituting the product). Public rulings are binding on the Commissioner.
The Commissioner rules on the application of the tax laws to the defined arrangement for the ‘class of persons’ involved.
A public ruling is not made – and does not become binding – until it is published and notice of the ruling is given in the Gazette.
A ruling is binding only in relation to the arrangement ruled upon. If the arrangement actually carried out is materially different to the arrangement described in the ruling, then the ruling has no effect. A material difference is one where it would be concluded that a different tax consequence would flow from the change. In these circumstances, action may be taken by the Tax Office to disallow any deductions that were claimed in reliance on the ruling.

From http://www.ato.gov.au/businesses/co...001/003/032/005/001&mnu=4290&mfp=001&st=&cy=1

If one made an investment, primarily with tax advantages in mind, which:

1) did not have an ATO product ruling; and/or
2) was not promoted and managed by a reputable organisation,

then it's really a case of "buyer beware". I don't say that without compassion for the people who were burned because they relied upon their advisers' advice about which schemes to invest in...but ultimately you have to take responsibility for your own financial future.

Cheers
N.

 

[geoffw]

Did those investors invest in schemes with ATO Product Rulings? Or if they did were the schemes run in accordance with said rulings?

Some of these invested before the product ruling system was set up.

 

[NigelW]

Some of these invested before the product ruling system was set up.

That's a fair point Geoff.

Cheers
N.

 

[nonrecourse]

Sophisticated investors and hybrid trusts

As someone who cut my teeth watching illiterate immigrants in Canada in the early 60's grow rich by do it themselves property investing, I have a few comments to make about the Australian tall poppy syndrome aka the hybrid trust blame game.

I have followed this website and prior to that in the early 1990's I had read everything I could get my hands on including Jan's early books and I have leaned heaps and am still learning. We have always refrained from contributing because I prefer to hold my cards close to my chest and the reaction of friends and family to our investment sojourn's has made me/us wary of standing out.

The first lesson in investing 101 is that sometimes you win and sometimes you lose, its your money and if your are a sophisticated investor you will have contributed heaps to what I call our "ouch" sinking education fund.

In the last few years we have all heard about Henry Kay, Westpoint, Fincorp and numerous other financial debacles all of whom are made out to be investment guru's whom the press love to pillor as guru's with clay feet.

The underlying continuing theme with all these stories is that the unsophisticated investors park their brain at the front desk when they seek the advice of their accountant, solicitor,banker,investment advisor or sooth sayer!

I have read Dale's Trust Magic and an earlier work of his Tax Battles and continue to use them as working templates. His advice on documentation and preparing for the inevitable tax audit should be in every sophisticated investors library. Years ago I picked up a book about trusts writen by Chris Batton a young property solicitor its out of print now another classic for the uninitiated.

Having said that when it came time for us to set up a Hybrid Trust we went to our own trusted solicitor for an independent assessment of our needs. In our case he set the Trust Deed after carefully questioning our investment goals and explained the need to apportion xxxx of the class A units to me the borrower of the funds and sole director, xxx B class units to my wife and xxx B class shares to the family trust. We also set out loan agreements between my self and the new Trust for the initial deposit (10%) of the asset the trust was purchasing as well as a loan agreement between the family trust and the new trust to park the income in another mortgage with a benchmark interest as determined by the ATO so that the investment was not the sole source of income flowing back to the new hybrid trust.

Are we sure that the interest I claimed will be accepted by the ATO? There are no free lunches. We are satisfied that we did our utmost to comply with current tax law and we approached our current investment with our eyes on making a profit full stop. The choice was ours and if the tax office wishes to move the goal posts we have the right of appeal.

My final point is to say we try and learn from a variety of sources. I would not use either Dale or Chris as my main advisors even though I think they are both leading edge tax and law practitioners. Why? because they are tall poppies and sometimes their clients will end up being on the bleeding edge because of the politics of taxation and the individuals who seek their advice do not follow it to the letter but will then want to shoot the messanger.

 

[DaleGG]

Hi Julia

As a tax expert, yourself, surely you understand that weeks could be months....

But, if you know of a quicker way to get an answer then I am quite prepared to consider it.

Remember, I am not doing this for me; nor for my clients, but instead to attempt to get some closure on this topic and avoid the fear mongering.

Dale

Does this mean we won't have an answer we can rely on in a matter of weeks?

 

[DaleGG]

Hi

What an absolutely brilliant post. Thank you for the clarity of your thinking and the common sense practicality of your suggestion.

Dale

As someone who cut my teeth watching illiterate immigrants in Canada in the early 60's grow rich by do it themselves property investing, I have a few comments to make about the Australian tall poppy syndrome aka the hybrid trust blame game.

I have followed this website and prior to that in the early 1990's I had read everything I could get my hands on including Jan's early books and I have leaned heaps and am still learning. We have always refrained from contributing because I prefer to hold my cards close to my chest and the reaction of friends and family to our investment sojourn's has made me/us wary of standing out.

The first lesson in investing 101 is that sometimes you win and sometimes you lose, its your money and if your are a sophisticated investor you will have contributed heaps to what I call our "ouch" sinking education fund.

In the last few years we have all heard about Henry Kay, Westpoint, Fincorp and numerous other financial debacles all of whom are made out to be investment guru's whom the press love to pillor as guru's with clay feet.

The underlying continuing theme with all these stories is that the unsophisticated investors park their brain at the front desk when they seek the advice of their accountant, solicitor,banker,investment advisor or sooth sayer!
.....

Having said that when it came time for us to set up a Hybrid Trust we went to our own trusted solicitor for an independent assessment of our needs. In our case he set the Trust Deed after carefully questioning our investment goals and explained the need to apportion xxxx of the class A units to me the borrower of the funds and sole director, xxx B class units to my wife and xxx B class shares to the family trust. We also set out loan agreements between my self and the new Trust for the initial deposit (10%) of the asset the trust was purchasing as well as a loan agreement between the family trust and the new trust to park the income in another mortgage with a benchmark interest as determined by the ATO so that the investment was not the sole source of income flowing back to the new hybrid trust.

Are we sure that the interest I claimed will be accepted by the ATO? There are no free lunches. We are satisfied that we did our utmost to comply with current tax law and we approached our current investment with our eyes on making a profit full stop. The choice was ours and if the tax office wishes to move the goal posts we have the right of appeal.

My final point is to say we try and learn from a variety of sources. I would not use either Dale or Chris as my main advisors even though I think they are both leading edge tax and law practitioners. Why? because they are tall poppies and sometimes their clients will end up being on the bleeding edge because of the politics of taxation and the individuals who seek their advice do not follow it to the letter but will then want to shoot the messanger.

 

[Mry]

nonrecourse, lets keep the personal element out of our 'bites' and focus on the topic at hand. Discussing HDTs is the point of the thread, not bashing people around and taking the discussion into the gutter.

I enjoy having Dale talk on this thread, and I am sure he does too. We have already lost CoastyMike, a voice of brilliance, because some people could not learn the difference between a debate of ideas and personal attacks. Lets not have that happen again.