Another Blow to Hybrids

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

as a new investor i for one apprecate your willing to give up your own time and money to prove this works,

however

i am just wondering, if in the mean time while you are waiting for your answer, chris comes back and says everything is ok and has the PBR and ATO rulings to prove it, would there then be a reason to continue with your approach?

i also believe no matter what dale does to prove it, the amount of different deeds for HDTs will always lead to confusion on this subject... im sure if dale and chris pull it off, there will be another accountant trying to push it just that little bit further...
 
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.

Sorry to hear that Mry, I realised he had been quiet but just thought he must be away:(

I really enjoyed his posts and his knowledge.
 
Dale -
As a tax expert, yourself, surely you understand that weeks could be months....

Ok then does anyone have ideas or advice on how people with HDTs should prepare their 2007 ITRs? Is it better to just claim up to the amount of income rather than risk the ATO high rate of interest if amendments have to be made later. etc. Any discussion?
 
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.

Nonrecourse

I think this is a very valid point.

We continue to use our pre investing accountant for exactly this reason. He has his own area of expertise which he has developed since we first went to him when he was a standard suburban practice , but he has few "sophisticated investors " and I don't have to worry about being caught up in an ATO crack down based on what accountant I use , though from what I understand Dale prides himself on never having lost to the ATO so maybe they won't taget his clients, just some of the ones who fly closer to the wind.

We have gone to specialists for specific advice , and will continue to do that .

Cliff
 
Sophism and misconstruded bites

Hi MRY; ????????:confused:

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.

It seems we have a dichotomy of views. Dale seems to think I have a clarity of thought and you reply with a diatribe about a percieved personal atack on you or ??.
If you read my post carefully the message I was trying to get across was look in the mirror if you have problems with your investments don't blame someone else. That was a general comment. The sharp end of the broking and investment indusrty like to describe the unsophisticated mom and dad investors as pigs because they squeal when they are stitched up because they do not think through their investments, are led like sheep to the slaughter.

I come to praise Caesar "I enjoy having Dale on this site" et tu brute? I'm not here to defend Dale he's a big boy and doesn't need my help. The facts about hybrid trusts is that the issue is yet to be resolved and speculating on what might happen is neither useful or productive.

Many years ago the tax department took on Chris Batten if my memory serves me correctly they didn't like the very valuable and tax effective advice he was giving his clients. The tax department has a very important job in protecting the revenue base. Fortunately though we live in a democratic society where the courts are the final arbitrator not the bean counters.

I am quite happy mry to stick to the facts, a segment of this discussion has been based on hersay that the courts view as inadmisable evidence why don't we stick to the same principal when discussing Hybrid Trusts?
 
Hi

We continue to prepare tax returns for the HDT's that use a Batten/MGS trust deed based on our knowledge, experience and advice received.

Nothing has changed for us in this regard.

However, if one of the inferior deeds pop up then we will alert our clients to the risks and suggest of the deed failing and suggest that they either not claim the expenses they think they can claim; or, suggest they head off to another accountant who tells them they can.

Yes, if something was to show up on the radar in the meantime, and, we thought it best to do so then I would not proceed with the declaratory order idea.

Dale

ps Thank you for your kind thoughts, too.

as a new investor i for one apprecate your willing to give up your own time and money to prove this works,

however

i am just wondering, if in the mean time while you are waiting for your answer, chris comes back and says everything is ok and has the PBR and ATO rulings to prove it, would there then be a reason to continue with your approach?

i also believe no matter what dale does to prove it, the amount of different deeds for HDTs will always lead to confusion on this subject... im sure if dale and chris pull it off, there will be another accountant trying to push it just that little bit further...
 
Hi

As I ahve said over and over again.....

It depends upon what type of HDT you are talking about.
If a Batten or MGS deed then I am prepared to continue to treat this as "steady as she goes"

However, if a poorly worded deed, then, I would be willing to lose a client than claim something that I fear will fail scrutiny and if the client insists on claiming the interest over an dabove the trust income.

Dale


Ok then does anyone have ideas or advice on how people with HDTs should prepare their 2007 ITRs? Is it better to just claim up to the amount of income rather than risk the ATO high rate of interest if amendments have to be made later. etc. Any discussion?
 
Nice fat consulting fees

Hi davea;

so you use the savvy accountants for advise but not to complete your returns? how do they take it when the know you only want advise, ie consulting role?

No problem in requesting for that if your honest and give them the courtesy of sending them your quries in advance so that their valuable time is not wasted. If you want independent advice you have to be prepared to pay $$$$. It never ceases to amaze me that "investors" will go to free? consultations with financial planners employed by the big banks and insurance companies and then complain about the lousy advice. Its the same as not getting a building inspection when purchasing a new IP or not being willing to pay a quantity surveyor or a valuer.....
 
Hi davea;



No problem in requesting for that if your honest and give them the courtesy of sending them your quries in advance so that their valuable time is not wasted. If you want independent advice you have to be prepared to pay $$$$. It never ceases to amaze me that "investors" will go to free? consultations with financial planners employed by the big banks and insurance companies and then complain about the lousy advice. Its the same as not getting a building inspection when purchasing a new IP or not being willing to pay a quantity surveyor or a valuer.....

yes but charge out rates for consulting work is a lot higher than the normal planning work for an annual tax return? so i would imagine it is not the most cost efficant way? id also imagine it could be an hour here and there, not an hour worth of questions and answers which can easily billed? how do you apprach this

or are you prepared to pay a little more to get the independant advice?

sorry for the off topic question, might start a new topic about it actually....
 
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.

Thanks for sharing non-recourse. I don't quite follow though, do you negative gear with units used to purchase property in a HDT?

GSJ
 
Thank you Dale, we now seem to have found some common ground and this discussion can move on.
It seems certain that some HDTs will not pass and a clear answer is unlikely before 2007 tax returns have to be lodged. You are only confident in the Chris Batten and MGS deeds but unfortunately you cannot tell us specifically what the difference is.
This year you will be advising anyone with a deed you consider won’t pass that they either only claim interest up to the amount of the income or find another accountant.
I certainly hope you will be able to tell us what specifically makes Chris Batten’s and MGS’s deeds different before the need to lodge tax returns but as you have said it could take months. And late lodgers are probably already wondering what to do with their 2006 returns.
So let’s move onto what someone with a HDT deed that may not cut it, should do. Dale says only claim interest up to the amount of income received. This certainly seems a safe harbour it is supported by PBR 66298 which is not binding on the ATO but TR 95/33 and Fletchers case are. For many taxpayers this will mean no refund cheque and possibly liquidity problems so it will be tempting to lodge as usual, if they can find an accountant that will do so. Does anyone have something to contribute as to the possible consequences?
I was thinking along the lines that by the time the whole matter is resolved the ATO may not go back as far as 2007. Note they can go back as far as they like but they may leave it alone and have done so with other issues.
There is also the interest cost. ATO interest is generally twice as much as bank rates so having their money for a period of time may not be worth it.
What if your HDT does pass the test? You are only entitled to amend back 4 years from the date of assessment to claw back your lost refunds.
The ATO has just released a practice statement on settling widely-based tax disputes, PSLA 2007/6 at paragraph 46 says consideration is given to the compliance history of the taxpayer, the level of uncertainty surrounding the law at the time and the ATO information available. So it does seem that the ATO will be a more lenient if the taxpayer behaves in a suitably compliant fashion.
On the other hand maybe send a copy of your deed to the ATO with a ruling application. They are required to respond promptly but I have seen them use the excuse that the matter is under review to delay for years. The risk here is drawing attention to yourself. But at least it is a relatively low cost way of hopefully finding out more. Another and no doubt more costly option is to seek a legal opinion but this will still not give you certainty as to how far the ATO will go to argue against this legal opinion.
Maybe this forum can facilitate people with the same deeds getting together and lodging an application for a private binding ruling for the one who has the least to lose. I know the ATO is bias and a PBR does not mean it will go that way in the courts.
 
Hello;
Thanks for sharing non-recourse. I don't quite follow though, do you negative gear with units used to purchase property in a HDT?

GSJ

Yes in our case we sold another property then set up a HDT. I then personally borrowed the entire amount plus stamp duty (it was a commercial building)plus GST plus legal fees. I then had my solicitor draw up a loan agreement for the deposit on the new property with the HDT and I supplied the10% deposit from some of the proceeds of the property I sold of which my corporate trustee company used when the initial offer was set up. The contract was made out in my name and or nominee which in Victoria is adequate.

I also made a loan agreement with my discretionary trust and paid down another mortgage in that trust with the remaining proceeds from the sale and put in place a redraw facility to draw down the interest in advance each year from that property to pay for the new property in the HDT. We also had to use another property as security to get the 110% for the new property in the HDT.

I then suggested to my solicitor that we use the GST refund that came back to the HDT to further pay down the property in the discretionary trust via a loan agreement. ( All loan agreements charge the bench mark interest rate that the ATO publishes each year) And the final kicker which had my solicitor saying yes this will qualify was when I suggested we set up another loan agreement between the HDT and DT so that the rental income from the new property was loaned to the DT which further reduce the interest charges in the property that the DT had (The one that has a redraw facility on). At the end of the financial year when the interest only payment is due the funds are drawn out of the DT property and paid against the interest only loan in the HDT which then flows back to me the borrower. An additional sum in interest from the DT is paid to the HDT and me. My interest portion that both the DT and the HDT pay me is recontributed back to the HDT after tax.

The interest on the HDT property was fixed interest only at 6.69% and the DT property was P&I variable at 6.82 variable. The bench mark interest charged this year was around 7.5% I think. By moving mony into the DT property that had a redraw facility on it I was saving interest and so effectively paying the HDT 0.68% on top of the savings. By not just relying on the rental agreement it adds complexity and makes good financial use of the funds as well as demonstrating financial viability.

The rental income into the HDT covers 75% of the interest only component and because the tennant is an ASX 150 company they pay the single holding land tax component and all outgoings. The property is 2 years old so there were significant depreciation benifits. This brought up a gap of less than 10% in the first year of which the rental income in the DT property more than covered that through the redraw facility. With the lease agreement by the end of the 3rd year the HDT should show a small profit and the DT property should just about be paid out allowing for the next purchase.

The best way to under stand this is draw two seperate circles one with HDT in it and a small house and another with DT and a house then investor at the bottom and ATO at the top and a seperate house on its own to one side then just draw in what I have described. I work better with pictures!

The final comment is because I sold and bought in the same financial year and took an interest only loan paid in advance there was no capital gains tax to pay as the gain was offset by the interest only payment in advance for that financial year which occurred in June. I could have done the same exercise without a trust legally to wipe the capital gain so there is no tax avoidance involved. The trust is there to build a protected property portfolio and stands on its merits.

I hope I haven't confused you further.
 
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Hi nonrecourse,

Thanks for that contribution.

As you said, it's much easier to understand with pictures.

You seem like you have a pretty strong understanding of the accounting involved in this structure.

I'll need to re-read this post again before I fully grasp what you were trying to achieve and how, but some initial observations...

There are many interpretations and uses of the HDT, each with differing deeds and objectives, and making broad statements that suggest all HDT's are bound to fail, is probably not accurate. Your use of the HDT is a good example of the different ways it can be used, and handled by different accountants and solicitors. Further, structuring is very important for an investor, as un-doing and re-organising a poor structure can be time consuming and costly.

Please correct my initial understandings below...

It seems that you had one property (property A) outside any trust structure (unprotected), and another property (property B) inside a DT (protected) but incurring losses that were trapped inside the trust.

You've sold property A and used most of the funds to reduce the debt on property B. Some of the sale proceeds went towards the 10% deposit on property C, which was bought by the HDT. The rest of the borrowings to purchase property C were done in your name, with property C acting as security. As you wanted to borrow to cover the costs of stamp duty/legals, these extra borrowings were secured against another property, say property D, which appears to still be outside of any trust structure...maybe property D is your PPOR (?).

What happens after this, I don't follow just yet, but I'll have another read of your post a bit later and see if it becomes clearer...

Thanks,

GSJ
 
Hi nonrecourse,

Thanks for that contribution.

As you said, it's much easier to understand with pictures.

You seem like you have a pretty strong understanding of the accounting involved in this structure.

I'll need to re-read this post again before I fully grasp what you were trying to achieve and how, but some initial observations...

There are many interpretations and uses of the HDT, each with differing deeds and objectives, and making broad statements that suggest all HDT's are bound to fail, is probably not accurate. Your use of the HDT is a good example of the different ways it can be used, and handled by different accountants and solicitors. Further, structuring is very important for an investor, as un-doing and re-organising a poor structure can be time consuming and costly.

Please correct my initial understandings below...

It seems that you had one property (property A) outside any trust structure (unprotected), and another property (property B) inside a DT (protected) but incurring losses that were trapped inside the trust.

You've sold property A and used most of the funds to reduce the debt on property B. Some of the sale proceeds went towards the 10% deposit on property C, which was bought by the HDT. The rest of the borrowings to purchase property C were done in your name, with property C acting as security. As you wanted to borrow to cover the costs of stamp duty/legals, these extra borrowings were secured against another property, say property D, which appears to still be outside of any trust structure...maybe property D is your PPOR (?).

What happens after this, I don't follow just yet, but I'll have another read of your post a bit later and see if it becomes clearer...

Thanks,

GSJ

Property D is not PPOR just an investment that was purchased prior to us needing to use trusts. Property B was making a small loss in the Discretionary Trust but this was offset against other income in the trust. Because I also have made loans to the DT and HDT and between them as well and they are paying intrest at the ATO bench mark rate. This also adds to the commercial complexity of the question will my personal interest charges regarding the HDT be allowed. :confused:
 
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