Chan and Naylors response to TA 2008/3 Uncommercial use of certain trusts ?
Bianca,
What is Chan and Naylors response to TA 2008/3 Uncommercial use of certain trusts ? I know another post indicated that it was only uncommercial uses that was of concern.
Do Chan and Naylor believe that capital gains can be distributed to someone other than the special income unit holder ? I understand that they used to be of this view, and in fact so did many other people, but has their view changed following discussions with the ATO and the taxpayer alert ?
Secret Squirrel indicated that he was of the understanding that officers from the ATO had visited Chan and Naylor enquiring about their hybrid trusts. Is this true and what was the outcome ?
Thank you Coastymike for your question
I have asked the accountants here at the office and here is their response
The Australian Taxation Office (“ATO”) on 26th March 2008 issued a tax alert TA 2008/3 Uncommercial use of certain trusts.
In summary this alert focuses on the tax deductibility of interest on borrowed funds used to subscribe to income units in a hybrid trust.
To be commercial, unit holders must be able to show that they reasonably expected to make a positive return from their investment in the trust. It is also critical that trust deeds are properly constructed to allow the commercial use of the Trust. Some Hybrid Trust Deeds do not allow this. For example some Hybrid Trust Deed do not allow the Income Units to have a Capital component.
An extract from the ATO media release 2008/13 states “The Tax office is not concerned about all discretionary or hybrid trust arrangements. Rather, we are concerned about negatively geared trust arrangements which involve the taxpayer incurring interest expense or borrowing costs which all or a proportion of the borrowed funds could be used for the benefit of the beneficiaries, or where the taxpayer’s interest in the trust could be brought to an end before their costs of investment have been recouped.”
In other words when one purchases units in a Trust there is an intention that the negative gearing will eventually become positive and there is an expectation of capital gain on the unit, than we believe you have complied with the commerciality test.
The Tax Alert simply states the obvious and what Chan & Naylor have always stated, that you cannot use the Trust on an uncommercial basis.
Again let us reiterate the Tax Alert does not state that you cannot use a Hybrid trust. If you have the correct Hybrid Trust Deed than its not the Hybrid Trust that is the problem but HOW YOU USE the Hybrid Trust that is the problem.
This has been confirmed during our discussions and meetings with the ATO over the last few months and also confirmed by our Queens Counsellor. We have also got written confirmation of this from our Tax Lawyers. The ATO has stated to us that they were only targeting “Uncommercial Trust Deeds” and their “uncommercial” use.
They were also extremely surprised to see that our deeds had a capital value attached to the Income Units. They said that most other hybrid Trusts they saw had the Income Units being able to be redeemed at cost.
Secondly in our planning sessions (called a Financial Health Check) with our clients we ensure that in addition to “commercial use” there must be “commercial INTENT”. This is always done before any PIT or structure is recommended to ensure that there is always a commercial positive return from their investment whether that be in the form of positive rental return over time or whether it is an aggregation of return over time (ie first 5 years could be negative but the next 7 years could be positive and in total the aggregated return is positive). It is the taxpayers intention and subsequent actions which will ultimately determine the deductibility or otherwise of interest. The Hybrid Trust Deed must allow the reflection of both these tests. Some Hybrid Trust Deeds do not.
The ATO changes its point of view from time to time and is also influenced by what comes out of the courts.
For example the CPT Custodians and Karingal Holdings High Court case changed the OSR’s view in respect to how to treat Unit Trusts for land tax purposes. For over 50 years they treated Unit Trusts with a land tax threshold in NSW and than overnight after the Custodian case (which was a Victorian case and not even a NSW matter), they changed their views.
We assist clients achieve their objectives within the law and as the courts moved with interpretations then we advised clients accordingly.
Now that the final legislation is out in NSW we are working closely with our lawyers to determine appropriate strategies to assist clients minimise their land tax exposure within the legislation.
People often ask what use are trusts if not for tax. There are many as follows. Clients should also understand that if their intention or dominant purpose for pursuing a certain strategy is for the tax benefit that is Tax Avoidance, and they may have their deductions disallowed by the ATO. Trusts serve many purposes including asset protection, estate planning and a structure to derive income. Further to these benefits our hybrid trusts including our PIT’s have other useful benefits including but not limited to 1) having no vesting date ie normally trust would need to be “closed” after 80 years thereby triggering CGT and if assets wanted by the “family” payment of stamp duty (this certainly does not allow the passing of assets from generation to generation), 2) ability to easily split or clone so as to allow different assets purchased under in the trust to latter have different trustees if required, 3) lineage clause to add some additional assurances as to who in the family gets trust assets on a trust dissolvment. These latter benefits as you can see maybe useful even if no higher order requirements are needed.
Each persons individual circumstances and requirements need to be taken into account on a case by case basis which is why we recommend that you seek specific advise prior to taking any actions. It is normally too late after.
Hope this answers your questions
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au