ATO Taxpayer Alert on 'Hybrid Trusts'

Now hang on a minute. What MGS put out is a statement that in their opinion their deed will not be caught by the ATO. Ed Chan put out a similar statement about the PIT and added that providing his clients use it correctly.
MGS are not saying the ATO has approved their deeds or given them a ruling they are just saying their deed doesn't have any of the elements listed in TA 2008/3. Mind you in making that statement they seem to be saying (it is not quiet clear so I could be wrong) that if their deed says redeemed at value then that really means redeemed at market value and it is ok that their deed gives the trustee the right accumulate income because, if units are on issue, that is only in respect of the remainder of the income. This last bit is a bit confusing if the unit holders must get the same return as they would if they owned the investment directly.

It also states that "Abusive Hybrid Discretionary Trust may be those that purport to allow a geared unitholder to claim deductions for interest expenses incurred on loans to acquire units, but where the unit holder receives distributions of something less than what they would have if they'd invested in an asset directly

How many people thought that by having a HDT they would in someway pay less income tax than if they purchased the asset directly? And if not why did you enter into the HDT arrangement?

Sorry but I don't find the statement by MGS reassuring at all. Why haven't they got an ATO ruling to rely on?
 
From the MGS response, what are the implications of the "proportionate theory"?

Particularly in relation to capital gains?

They say that this "determines the entitlement of the unitholder to capital gains and the value of their units for redemption purposes"...

What does this mean???

Is this something that is more relevant for someone purchasing property in a HDT on lower LVR's?

Eg. 60% LVR or 75% LVR, as opposed to eg. at 95->100% LVR.

Thanks.
 
Terryw said:
Here is a copy of the MGS response.
Click to expand...


On page 3 of the MGS response it states the following:

"Restricting a unitholder's entitlement to capital or corpus doesn't restrict their entitlement to capital gains;"

I read this as implying that HDT's still do offer asset protection. The fact that a unit holder would be liable for CGT if the units are sold does not mean the unit holder is entitled to the assets of the trust.

Am I reading this correctly?
 
Hi Invictus,

The best way you can understand this is to think about a publicly listed master trust. They buy a big CBD building for their portfolio. You buy units in this master trust. By Owning the units you are not entitled to the building itself ( corpus ) but, assuming capital growth, you are entitled to the capital gain on the sale of that building as well as the initial price you paid for the units if sold in the market. Now where it can get confusing is that there is a public market for your units in the master trust but with HDT Special Income Units there is no public market but the courts would view your units like they would units in a master trust, that is the initial value of the building and it's unrealised capital gain.
 
Pat said:
By Owning the units you are not entitled to the building itself ( corpus ) but, assuming capital growth, you are entitled to the capital gain on the sale of that building as well as the initial price you paid for the units if sold in the market. Now where it can get confusing is that there is a public market for your units in the master trust but with HDT Special Income Units there is no public market but the courts would view your units like they would units in a master trust, that is the initial value of the building and it's unrealised capital gain.
Click to expand...

In the case of a publicly traded trust, though, the market price may well be lower than the asset backing of the unit. If you sell a unit with a $1 NTA for 90 cents because that's where the market is, the ATO doesn't infer a disposal at $1.
Alex
 
julia said:
Now hang on a minute. They are just saying their deed doesn't have any of the elements listed in TA 2008/3.
Click to expand...

Sounds fair enough to me Julia. If 'The Man' says it's OK then who are you or I to argue it isn't?

Are there any QC's on the forum who could give us their educated opinion?

Cheers,

Bazza
 
Bazza,
My point is the ATO haven't said their deed is ok, they have just stated that their deed does not have any clauses that the ATO object to. Now if this is the case you have to ask why haven't they asked the ATO for a ruling. The process is free. If instead they have paid for a QC's opinion then it suggest to me they feel that the ATO would not give them a positive response but they feel the QC knows the law better than the ATO. Now that is a very fair assumption but if that is their reasoning then I feel that they expect to have to go through the courts to win their argument. That is a level of uncertainty that I am uncomfortable with.
 
julia said:
Bazza,
My point is the ATO haven't said their deed is ok, they have just stated that their deed does not have any clauses that the ATO object to. Now if this is the case you have to ask why haven't they asked the ATO for a ruling. The process is free. If instead they have paid for a QC's opinion then it suggest to me they feel that the ATO would not give them a positive response but they feel the QC knows the law better than the ATO. Now that is a very fair assumption but if that is their reasoning then I feel that they expect to have to go through the courts to win their argument. That is a level of uncertainty that I am uncomfortable with.
Click to expand...

Julia your alternative to the HDT has been superseded by our mates the (hard) Labour party. As your well aware if a tax strategy is used by enough people to impact on revenue the ATO just moves the goal posts. Your constant harping about getting an iron clad tax ruling is nonsense and you know that. The ATO has ducked and weaved about HDT's for over 4 years now and continues to avoid spelling out its iron clad position because its primary goal is to protect its revenue base. I view it as a chess match where the other side tips the board over when it is losing. I have a variation on a HDT and for the moment it works for me. Every time the ATO changes the rules I have been able to adapt ... so far. Fortunately we do have the courts to fall back on when the ATO gets too greedy. You have clients who you have advised and the ATO/Government has come along and changed where the goal posts are, so are you suggesting you will compensate them... of course not. Don't be so one eyed about HDT's we are all on the same side.
 
It has been well settled law for many years that in order to negatively gear unit purchases, the deed must not allow anybody but the unit holder to enjoy both the income and capital gains that flow from that interest.

Combine this with the fact that the the Trustee is stuck with the old cost base when the units are redeemed and I have yet to see any benefits for simple individual property investors. No initial asset protection plus a double CGT hit (albeit deferred for the Trustee).

The only ducking and weaving I see from the ATO is its reluctance to admit that it has been tardy in allowing a large number of private investors to be duped into inappropriate structures for their purposes.

As I see it you have two choices, 1) Apply for a PBR or 2) sit tight and hope that political fallout will force them to somehow grandfather your trust or change the law.

In the meantime, you may be incorrectly claiming interest deductions.

Cheers,

Rob
 
I am sure this case has been mentioned somewhere in recent HDT threads ... but I can't be bothered searching.

The Taxpayer and Commissioner of Taxation [2008] AATA 325 (18 April 2008)

It appears to confirm that ANY discretionary right relating to trust property in which unit holders have an interest can defeat at least some of the interest deduction for those unit holders.

Even if you don't exploit the offending features, this does not necessarily make it OK.

Cheers,

Rob
 
guys
with all these uncertainties with HDT, it may be better to use a DT?

Can someone tell me how much does it cost to set up a DT?

Can I just copy an existing DT deed and change the name of the Trust myself? (legal?) or setting it up must go thru an accountant?
 
Hi Gang,

For that matter who knows what may happen even to Disc Trusts in the comprehensive tax review announced by the labour party. Last time under the Ralph Review it was proposed to treat Disc Trusts like companies. Imagine loss of CGT discount or even worse the possibility of having to formalise all loans to the Trust:eek: One thing for sure is that the ATO doesn't like DTs much at all and the labour party doesn't seem to have any great love for them either.

Interesting times may possibly be ahead!

Cheers - Gordon
 
Austini,

Don't stress about using methods that the ATO have approved of in rulings. For example discretionary trusts. As was the case with the Salary Sacrifice arrangement they will give you plenty of warning that the law will change and no penalties to people already in that arrangement. It is where they have not approved of the arrangement in rulings that if the courts find in the ATO's favor they can go back and make a mess of those involved. Big difference in the outcome.
The salary sacrifice arrangement survived for 20 odd years before they changed the law it would have been a shame to have missed out on its advantages for all that time just in case the law was changed.
 
Hey Julia,

Thanks for your reply.

Actually it was not really stressing so much as indirectly highlighting that whether its Salary Sacrifice, DTs or whatever we can only take advantage of structures and strategies according to the law of the day. I personally will continue to invest using Disc Trusts and the SMSF. However nowadays I take a very conservative approach.

Cheers - Gordon
 
Ok, I guess the conclusion is that with a HDT is when the property is eventually sold the Capital Gains goes to the Unit Holder? That is the proper way to use it.

With a Discretionary Trust, the Capital Gains can be distributed to beneficiaries....

AM I RIGHT?


:confused:
 
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