Attributable income in a hybrid trust

Discussion in 'WebBoard Property Investor Forum Archive' started by WebBoard, 26th Sep, 2002.

  1. WebBoard

    WebBoard Guest

    From: Michael Mudman


    Where units are bought in a hybrid trust, the unit holder is entitled to a proportion of the income generated by the asset held by the trust, which has been funded by the unit-holder.

    Eg- if the unit-holder borrows $80,000 to purchase units in the hybrid trust and the hybrid trust purchases a property for $100,000, then the rights attached to those units should be so the unit-holder is entitled to 80% of the net taxable income generated by the property.

    However, as the property increases in value, does the proportion of income flowing to the units diminish? Say, if the property is revalued to $160,000 – and the unit-holder still holds 80,000 x $1 units - would the unit-holder now be entitled to a 50% share of the net income rather than an 80% share? (with the remaining balance of the net taxable income flowing to the discretionary beneficiaries, in the same way as a normal discretionary trust).

    I read somewhere that this is the case. If so, and the unit-holder is using the income distribution from the trust to negative gear against their borrowings – and rental from the property hasn’t increased at the same pace as the value of the property – surely this must mean the increasing value will also increase the tax benefits of the unit-holder? Therefore any increase in the property's value is an advantage when it comes to negative gearing.

    Eg- Property value - $100,000
    Units held - $80,000
    Rental return - $5,000
    Property expenses - $2,000
    Net return - $3,000
    Unit holder’s entitlement (80%) $2,400
    Unit holder’s interest (8%) on $80,000 loan - $6,400
    Loss to unit-holder - $4,000

    Property re-valued - $160,000
    Units held - $80,000
    Rental return (no increase) - $5,000
    Property expenses - $2,000
    Net return - $3,000
    Unit holder’s entitlement (50%) - $1,500
    Unit holder’s interest (8%) on $80,000 loan - $6,400
    Loss to unit-holder - $4,900



    I hope this question makes sense!
     
    Last edited by a moderator: 5th Apr, 2017
  2. DaleGG

    DaleGG Member

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    Reply: 1
    From: Dale Gatherum-Goss


    Hi Michael

    I have cut and copied this from a solicitors notes that I have on Hybrid Trusts:

    Different solicitors have different approaches. One approach is to allocate units to unit holders. As for most unit trusts the units entitle the unit holder to a fixed proportion of the net income of the trust as at 30 June each year and to a fixed proportion of any capital distributions. However, the income and capital distribution rules also allow the trustee to:

    • by written resolution before 30 June allocate net income between the unit holders other than in proportion to each unit holder’s issued units as a percentage of total issued units;

    • by written resolution before a capital distribution, whether on the vesting of the trust or beforehand, allocate capital amounts including net capital gains between the unit holders other than in proportion to each unit holder’s issued units as a percentage of total issued units;

    • by written resolution before 30 June allocate net income allocated to a unit holder to persons included in a class of discretionary beneficiaries connected to that unit holder (typically family members and related companies and trusts); and

    • by written resolution before a capital distribution, whether on the vesting of the trust or beforehand, allocate capital amounts including net capital gains allocated to a unit holder to persons included in a class of discretionary beneficiaries connected to that unit holder.

    The attribution principle applies to hybrid trusts. This means specific taxation credits and rebates, and particular types of assessable income, including net capital gains, can be allocated between unit holders and, once so allocated, between individual discretionary beneficiaries connected to that unit holder.


    I hope that this helps answer your concerns.

    Dale
     
    Last edited by a moderator: 5th Apr, 2017