We went to 'How & Where to invest in 2008' on Saturday and first heard of PIT - property investment trust. It seems to be a new product? and that it's trade marked under Chan & Naylor which we assume our accountant won't be able to set one up for us (Our accountant has been very helpful and himself is an investor too). Wana know if anyone has a PIT? and their thoughts about this product. Any risk? with ATO?
Chan & Naylor - PIT trust
- Thread starter Olive
- Start date
In the interest of fair and balanced reporting and further to MRY’s links we have provided our response as follows:
Regarding misinformation about the PIT and other rumours Tony Melvin's post :
Tony Melvin re Chan & Naylor and the PIT Link
Also further to Chris Batten’s comments on our PIT, we supply below a rebuttal by our Tax Lawyer, Greg Vale below:
(Email received from Greg Vale on the 20/02/2006 Quoted in whole)
Dear Ed
In respect to what Chris Batten said:
"has the ability to direct income to discretionary beneficiaries that would otherwise go to Income Unit holders under the deeds "
- this is plainly wrong. The unit holders have an absolute entitlement to income.
"asking for trouble from the ATO"
- Chris Batten appears to be saying the trouble would arise because of the point above which is factually incorrect - so I am confident that the ATO will not have trouble with that aspect. As we have discussed on many occasions before, the ATO may have trouble with the following aspects:
people redeeming units before getting a positive return - this is when Fletcher & Ors v. FC of T 91 ATC 4538 could apply. This has nothing to do with how the PIT is drafted but how people use the PIT.
the formula determining the income paid to the unit holders but you have already decided to discuss this issue with the Commissioner of Taxation to obtain certainty for your clients
the general anti-avoidance provisions applying to home loan re-financing arrangements done for the dominant purpose of claiming tax deductions
"spoke recently to some senior people at the OSR and after consultation with the State Government Treasury Officials the OSR will be assessing unit trusts as special trusts from 31 December 2006"
-Chris Batten is not correct here as the OSR website (http://www.osr.nsw.gov.au/pls/portal/docs/page/downloads/other/landtax_unit_trusts_2006.pdf) has already been changed to reflect the changed method of assessment. The change is effective for the 2006 year being properties owned at 31 December 2005 - not 31 December 2006 as suggested by Chris Batten.
-The announcement by the OSR is a change to their long held view of the taxation of unit trusts for land tax and follows from a recent High Court decision CPT Custodian Pty Limited v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Limited [2005] HCA 53. The announcement is an administrative change by the OSR and not a change in the legislation made by Parliament. So there is still an issue as to whether this new interpretation adopted by the OSR is correct. As Chris Batten should know the CPT Custodian decision was based on the Victorian land tax legislation. The NSW provisions are different to the Victorian provisions. Further the reasoning of the OSR to come to their change of opinion (that unit trusts are now special trusts within the meaning of section 3A of the Land Tax Management Act 1956 (NSW)) was not even discussed in the High Court decision. So it does not automatically mean that the Victorian case will apply to NSW legislation. It is likely that some taxpayer in NSW will challenge the change in the OSR view in the Courts and until that process is complete we will not know whether the OSR are right or not. In the meantime the OSR will proceed as if they are right and do what they say in the announcement. Clients will need to object and work through the process. Ultimately taxpayers may be successful like the taxpayers were in CPT Custodian or they may not. If clients do not have the correct structure then they would never have had this chance to potentially save on land tax.
-Importantly the announcement by the OSR states that their change of view will not affect assessments issued in earlier years. Clients who set up PITs in earlier years are now closer to saving thousands of dollars in land tax.
As we all know the tax laws are continually changing. As you say Ed - this is part of the game of tax. Chan and Naylor come up with a smart way to save tax and they try and shut it down. Who will win can not be determined at this point in time but with a PIT you are in the game and have a chance (not a guarantee) to save on land tax. Even if the land tax saving does not materialise then there are other reasons for using a unit trust which may provide benefits to clients.
The tax effectiveness of the PIT depends greatly on the individual circumstances of each person and how they use the PIT. Just setting up the PIT does not give you a result. The ongoing advice you provide clients about using the PIT will greatly determine the tax effectiveness of the PIT. The issues are extremely complicated and the email from Chris Batten does not properly deal with all the issues.
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
Regarding misinformation about the PIT and other rumours Tony Melvin's post :
Tony Melvin re Chan & Naylor and the PIT Link
Also further to Chris Batten’s comments on our PIT, we supply below a rebuttal by our Tax Lawyer, Greg Vale below:
(Email received from Greg Vale on the 20/02/2006 Quoted in whole)
Dear Ed
In respect to what Chris Batten said:
"has the ability to direct income to discretionary beneficiaries that would otherwise go to Income Unit holders under the deeds "
- this is plainly wrong. The unit holders have an absolute entitlement to income.
"asking for trouble from the ATO"
- Chris Batten appears to be saying the trouble would arise because of the point above which is factually incorrect - so I am confident that the ATO will not have trouble with that aspect. As we have discussed on many occasions before, the ATO may have trouble with the following aspects:
people redeeming units before getting a positive return - this is when Fletcher & Ors v. FC of T 91 ATC 4538 could apply. This has nothing to do with how the PIT is drafted but how people use the PIT.
the formula determining the income paid to the unit holders but you have already decided to discuss this issue with the Commissioner of Taxation to obtain certainty for your clients
the general anti-avoidance provisions applying to home loan re-financing arrangements done for the dominant purpose of claiming tax deductions
"spoke recently to some senior people at the OSR and after consultation with the State Government Treasury Officials the OSR will be assessing unit trusts as special trusts from 31 December 2006"
-Chris Batten is not correct here as the OSR website (http://www.osr.nsw.gov.au/pls/portal/docs/page/downloads/other/landtax_unit_trusts_2006.pdf) has already been changed to reflect the changed method of assessment. The change is effective for the 2006 year being properties owned at 31 December 2005 - not 31 December 2006 as suggested by Chris Batten.
-The announcement by the OSR is a change to their long held view of the taxation of unit trusts for land tax and follows from a recent High Court decision CPT Custodian Pty Limited v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Limited [2005] HCA 53. The announcement is an administrative change by the OSR and not a change in the legislation made by Parliament. So there is still an issue as to whether this new interpretation adopted by the OSR is correct. As Chris Batten should know the CPT Custodian decision was based on the Victorian land tax legislation. The NSW provisions are different to the Victorian provisions. Further the reasoning of the OSR to come to their change of opinion (that unit trusts are now special trusts within the meaning of section 3A of the Land Tax Management Act 1956 (NSW)) was not even discussed in the High Court decision. So it does not automatically mean that the Victorian case will apply to NSW legislation. It is likely that some taxpayer in NSW will challenge the change in the OSR view in the Courts and until that process is complete we will not know whether the OSR are right or not. In the meantime the OSR will proceed as if they are right and do what they say in the announcement. Clients will need to object and work through the process. Ultimately taxpayers may be successful like the taxpayers were in CPT Custodian or they may not. If clients do not have the correct structure then they would never have had this chance to potentially save on land tax.
-Importantly the announcement by the OSR states that their change of view will not affect assessments issued in earlier years. Clients who set up PITs in earlier years are now closer to saving thousands of dollars in land tax.
As we all know the tax laws are continually changing. As you say Ed - this is part of the game of tax. Chan and Naylor come up with a smart way to save tax and they try and shut it down. Who will win can not be determined at this point in time but with a PIT you are in the game and have a chance (not a guarantee) to save on land tax. Even if the land tax saving does not materialise then there are other reasons for using a unit trust which may provide benefits to clients.
The tax effectiveness of the PIT depends greatly on the individual circumstances of each person and how they use the PIT. Just setting up the PIT does not give you a result. The ongoing advice you provide clients about using the PIT will greatly determine the tax effectiveness of the PIT. The issues are extremely complicated and the email from Chris Batten does not properly deal with all the issues.
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
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 ?
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 very much Bianca for clarifying the issues. I take it there are a few clients who may have received such an assessment. I was wondering if Chan and Naylor had any plans to address this issue directly with the ATO such that all clients could benefit from a determination or further clarification (if any). Notwithstanding that every client's individual circumstances are different, they are all still using a substantially similar PIT. As you could imagine, the additional cost for each individual to engage a tax professional at $250-$300 an hour to assist in submitting an objection would certainly add up by the time a desirable outcome could be achieved. I suppose no one wants to be the guinea pig to take em on. Who can blame them. Our system is riddled with processes and bureaucracy.
D*** C&N...they got us!
Hi Mry,
Thanks for the links. It answered many questions we (my husband & I) have been having for the last month re. PIT.
We setup a PIT with C&N on July 2007, and was NEVER been informed about the Land Tax implication, either during the Financial Health Check with their partner (I), nor later on during our dealings through our account manager (F).
Fast forward to early this month. We're on the process of purchasing another IP, so thought I'd shoot F an email clarifying about land tax as we're about to touch our land tax threshold (or so we thought - not realising that there is no threshold for PIT). His reply was that there was a recent change made by ATO and threshold will not apply anymore. His suggestion was for us to change our PIT into a Fixed Trust, so we could get our threshold back.
We tried to find out more about this Fixed Trust and clarified what the implications are for moving, etc. but numerous emails to both F & I went un-answered. They also wouldn't answer directly re. when the changes was implemented, etc. Just kept repeating that we need to change into a Fixed Trust structure (and pay a wee fee of $1K-ish) before 30th June 2008 or else pay land tax...no more explanation. Any more questions, please make appointment (and pay the $$$ hourly fee). That's it!
When we mentioned our findings (from Google search) that ATO changes was implemented before our trust was even setup, and not recently, they changed their story and said that we had been fully informed on this Land Tax implication during the trust setup! Well, both my husband & I must have been sleeping when they tell us, cause we couldn't remember it. We're not in litigatious business, so wouldn't even consider using PIT if we know of the land tax implications.
Reading some of the posts from the link, seems like there maybe another issue with income distribution with this trust.
So Olive, based on our experience above, I wouldn't reccommend using the PIT. They're quite expensive (we spent around $4K to setup trust + company + fee), there seems to be hidden landmines in them, and also the customer service afterwards is extremely poor.
Bianca, is there anyone in C&N that we could contact to get answers of our questions? They're not complicated questions that need 2-3 hours of consulting time, more like straight forward ones, like: can we claim neg. gearing and still distribute income via Fixed Trust, etc. Only a handful of questions that shouldn't take 5 mins to answer all. We're told when setting up the trust that we could ask 5 mins type question anytime, but hadn't been able to do so via our client manager so far. We'd be happy to come for consultation if questions need longer explanation times.
All, thanks for listening to my vent. I feel much better now, though the problem is still not solved.
I think I'll shut-up and go to bed now
Night2 everyone, kristaje
Hi Mry,
Thanks for the links. It answered many questions we (my husband & I) have been having for the last month re. PIT.
We setup a PIT with C&N on July 2007, and was NEVER been informed about the Land Tax implication, either during the Financial Health Check with their partner (I), nor later on during our dealings through our account manager (F).
Fast forward to early this month. We're on the process of purchasing another IP, so thought I'd shoot F an email clarifying about land tax as we're about to touch our land tax threshold (or so we thought - not realising that there is no threshold for PIT). His reply was that there was a recent change made by ATO and threshold will not apply anymore. His suggestion was for us to change our PIT into a Fixed Trust, so we could get our threshold back.
We tried to find out more about this Fixed Trust and clarified what the implications are for moving, etc. but numerous emails to both F & I went un-answered. They also wouldn't answer directly re. when the changes was implemented, etc. Just kept repeating that we need to change into a Fixed Trust structure (and pay a wee fee of $1K-ish) before 30th June 2008 or else pay land tax...no more explanation. Any more questions, please make appointment (and pay the $$$ hourly fee). That's it!
When we mentioned our findings (from Google search) that ATO changes was implemented before our trust was even setup, and not recently, they changed their story and said that we had been fully informed on this Land Tax implication during the trust setup! Well, both my husband & I must have been sleeping when they tell us, cause we couldn't remember it. We're not in litigatious business, so wouldn't even consider using PIT if we know of the land tax implications.
Reading some of the posts from the link, seems like there maybe another issue with income distribution with this trust.
So Olive, based on our experience above, I wouldn't reccommend using the PIT. They're quite expensive (we spent around $4K to setup trust + company + fee), there seems to be hidden landmines in them, and also the customer service afterwards is extremely poor.
Bianca, is there anyone in C&N that we could contact to get answers of our questions? They're not complicated questions that need 2-3 hours of consulting time, more like straight forward ones, like: can we claim neg. gearing and still distribute income via Fixed Trust, etc. Only a handful of questions that shouldn't take 5 mins to answer all. We're told when setting up the trust that we could ask 5 mins type question anytime, but hadn't been able to do so via our client manager so far. We'd be happy to come for consultation if questions need longer explanation times.
All, thanks for listening to my vent. I feel much better now, though the problem is still not solved.
I think I'll shut-up and go to bed now
Night2 everyone, kristaje
Last edited by a moderator:
Its important to keep things professional here rather than to use disparaging remarks as that can lead to informed people withdrawing from the discussion. I for one would like to hear the public responses to the questions that are posted here as I know that many people read the things on this forum that do not participate in them.
In the end though, we should all be well informed as investors on the benefits and pitfalls of various structures before we use them in our strategies as vehicles to hold our wealth. Many people have paid a heavy price for not investigating these things through. We all know the difference between investing and gambling.
In the end though, we should all be well informed as investors on the benefits and pitfalls of various structures before we use them in our strategies as vehicles to hold our wealth. Many people have paid a heavy price for not investigating these things through. We all know the difference between investing and gambling.
ASDF wrote
“…Thank you very much Bianca for clarifying the issues. I take it there are a few clients who may have received such an assessment. I was wondering if Chan and Naylor had any plans to address this issue directly with the ATO such that all clients could benefit from a determination or further clarification….”
In this matter it was not the ATO that we were referring to but the OSR which handled land tax matters. When they adopted the CPT Custodian case in NSW as the principle case to change their attitude towards how they assessed Unit Trusts, they did so without going to Parliament but simply through an administrative procedure.
Remember, they have for over 50 years applied a land tax threshold to Unit Trusts and than overnight (due to the CPT Custodian case, which was not even a NSW case but a Victorian case) they decided to disallow a land tax threshold to Unit Trusts. This was done administratively and not legislatively which is another story.
We lobbied the opposition and the opposition leader at that time took the matter to a parliamentary hearing. We went to BRW and the Financial review and they both wrote up a story on this matter. We went to Alan Jones and others. We gathered thousands of names from our client base and submitted this to the NSW government. We even asked people on this Forum to assist us but we had opposition from Chris Batten and his followers against this so we received not a single person register their support from this Forum.
We (and others) were able to get the government to grandfather their original changes and they allowed a period of time for all clients to change their Unit Trust to Fixed Trusts where they would get a land tax threshold. We than sent a letter to all our clients and assisted them all in getting their Trusts (if appropriate) changed over so now those who are entitled to get a land tax threshold have achieved this.
We have determined based on the Victorian CPT Custodian case that even if we found someone willing to take the NSW Government to court there is now a case that has been through court and the small differences between NSW and Victorian Legislation were so small that the chances of winning were only slight and there were other ways to “skin a cat” rather than face them head on.
Our main gripe with the NSW government has been that we have set up clients structures over the last 20 years of being in business based on a precedent that the NSW government has followed for over 50 years and they than saw a grab for extra money and changed the law overnight (correction, they still have not changed the law, they have simply made an administrative change) which netted them hundreds of millions of extra dollars in land tax. This was not only unlawful but un Australian.
We ran that campaign for many months until they came back with a concession.
All our clients have now had their Trusts changed to accommodate the new changes at a considerable cost to everyone (as we did 90% of the work pro bono even though the NSW changes were not our doing.)
We believe that over the next few months the solution for land tax woes in NSW will come one step closer to being eliminated (or at least minimised) as we have been working on a solution for many months now (since the NSW’s grab for more land tax) and are very close to getting the “all clear” from our Tax Lawyers to use it.
If you have not gathered by now that everything we do and come up with is run by our Tax Lawyers and from time to time run by our Queen’s Counsellor (now known as “Silks”) before they are released to the market. We also have Tax Rulings on things that we consider are on the borderline. If things are obvious and both the Tax Lawyers and “Silks” have passed as OK we do not bother to spend the money for a Tax Ruling as we value our Silks opinion over the ATO’s opinion. Remember the ATO have probably lost more than they have won of the cases they have taken to court, so their interpretation of the law is not always correct.
Hope that answers your question.
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
Any advice given here is of a general nature only. We disclaim responsibility from anyone relying on advice from this posting. We recommend that you seek your own independent advice from your tax agent or accountant or financial advisor
“…Thank you very much Bianca for clarifying the issues. I take it there are a few clients who may have received such an assessment. I was wondering if Chan and Naylor had any plans to address this issue directly with the ATO such that all clients could benefit from a determination or further clarification….”
In this matter it was not the ATO that we were referring to but the OSR which handled land tax matters. When they adopted the CPT Custodian case in NSW as the principle case to change their attitude towards how they assessed Unit Trusts, they did so without going to Parliament but simply through an administrative procedure.
Remember, they have for over 50 years applied a land tax threshold to Unit Trusts and than overnight (due to the CPT Custodian case, which was not even a NSW case but a Victorian case) they decided to disallow a land tax threshold to Unit Trusts. This was done administratively and not legislatively which is another story.
We lobbied the opposition and the opposition leader at that time took the matter to a parliamentary hearing. We went to BRW and the Financial review and they both wrote up a story on this matter. We went to Alan Jones and others. We gathered thousands of names from our client base and submitted this to the NSW government. We even asked people on this Forum to assist us but we had opposition from Chris Batten and his followers against this so we received not a single person register their support from this Forum.
We (and others) were able to get the government to grandfather their original changes and they allowed a period of time for all clients to change their Unit Trust to Fixed Trusts where they would get a land tax threshold. We than sent a letter to all our clients and assisted them all in getting their Trusts (if appropriate) changed over so now those who are entitled to get a land tax threshold have achieved this.
We have determined based on the Victorian CPT Custodian case that even if we found someone willing to take the NSW Government to court there is now a case that has been through court and the small differences between NSW and Victorian Legislation were so small that the chances of winning were only slight and there were other ways to “skin a cat” rather than face them head on.
Our main gripe with the NSW government has been that we have set up clients structures over the last 20 years of being in business based on a precedent that the NSW government has followed for over 50 years and they than saw a grab for extra money and changed the law overnight (correction, they still have not changed the law, they have simply made an administrative change) which netted them hundreds of millions of extra dollars in land tax. This was not only unlawful but un Australian.
We ran that campaign for many months until they came back with a concession.
All our clients have now had their Trusts changed to accommodate the new changes at a considerable cost to everyone (as we did 90% of the work pro bono even though the NSW changes were not our doing.)
We believe that over the next few months the solution for land tax woes in NSW will come one step closer to being eliminated (or at least minimised) as we have been working on a solution for many months now (since the NSW’s grab for more land tax) and are very close to getting the “all clear” from our Tax Lawyers to use it.
If you have not gathered by now that everything we do and come up with is run by our Tax Lawyers and from time to time run by our Queen’s Counsellor (now known as “Silks”) before they are released to the market. We also have Tax Rulings on things that we consider are on the borderline. If things are obvious and both the Tax Lawyers and “Silks” have passed as OK we do not bother to spend the money for a Tax Ruling as we value our Silks opinion over the ATO’s opinion. Remember the ATO have probably lost more than they have won of the cases they have taken to court, so their interpretation of the law is not always correct.
Hope that answers your question.
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
Any advice given here is of a general nature only. We disclaim responsibility from anyone relying on advice from this posting. We recommend that you seek your own independent advice from your tax agent or accountant or financial advisor
But if you had an ATO ruling that would shut up all the detractors and re-assure your clients wouldn't it? Or are you worried the ATO will give you the 'wrong' view when the PBR is assessed?
Hi Guys,
At no point did I mean to hijack the thread for unfavourable reason. I was responding to Olive question re. experience with PIT. So all views expressed above are based on MY personal experiences in dealing with C&N so far. I did expressed my view quite harshly & passionately, but they're never meant to be disparaging. Rather it is my frank opinions on the matter. Sorry if I offend anymore with my frank remarks.
I believe some people (I for one) join this forum to hear about others honest opinion and first hand experiences, either in facing certain scenarios or dealing with certain professionals. Personally I'd be very dissapointed if we can't share experiences (in dealing with certain banks, professional, etc.) because they can be potentially considered as insult to those people rather than what it is, which is sharing personal experiences.
Maybe I shouldn't ask those questions to Bianca in an open forum? Maybe. But I'm at my wits end here in dealing with C&N and don't know how else I could contact on their side to get the info to sort out our PIT situation. Even to make appoinment is pretty tough with unreturned calls.
Mry, I agree that we should make well informed decision as an investor, rather than following what professional said. We did make an informed decision entering the PIT, it's just that the information we received was only partial and not full information including pitfalls and consequences, which was the issue in the first place. Unfortunately as a non-lawyer we don't have the skills to decipher the thick trust document outselves and have to depend on the professional that we hire.
At no point did I mean to hijack the thread for unfavourable reason. I was responding to Olive question re. experience with PIT. So all views expressed above are based on MY personal experiences in dealing with C&N so far. I did expressed my view quite harshly & passionately
, but they're never meant to be disparaging. Rather it is my frank opinions on the matter. Sorry if I offend anymore with my frank remarks.I believe some people (I for one) join this forum to hear about others honest opinion and first hand experiences, either in facing certain scenarios or dealing with certain professionals. Personally I'd be very dissapointed if we can't share experiences (in dealing with certain banks, professional, etc.) because they can be potentially considered as insult to those people rather than what it is, which is sharing personal experiences.
Maybe I shouldn't ask those questions to Bianca in an open forum? Maybe. But I'm at my wits end here in dealing with C&N and don't know how else I could contact on their side to get the info to sort out our PIT situation. Even to make appoinment is pretty tough with unreturned calls.
Mry, I agree that we should make well informed decision as an investor, rather than following what professional said. We did make an informed decision entering the PIT, it's just that the information we received was only partial and not full information including pitfalls and consequences, which was the issue in the first place. Unfortunately as a non-lawyer we don't have the skills to decipher the thick trust document outselves and have to depend on the professional that we hire.
Dear Kristaje
Thankyou for your posting and I am sure we can work through your issues. We have contacted you by email to arrange a time to discuss your concerns with the Managing director of Chan and Naylor Australia ....otherwise you can contact myself on 9391-5400 to arrange an appropriate time to have a discussion.
Regards
Bianca on behalf of Chan & Naylor Accountants
Thankyou for your posting and I am sure we can work through your issues. We have contacted you by email to arrange a time to discuss your concerns with the Managing director of Chan and Naylor Australia ....otherwise you can contact myself on 9391-5400 to arrange an appropriate time to have a discussion.
Regards
Bianca on behalf of Chan & Naylor Accountants
Chan and Naylors response to TA 2008/3 Uncommercial use of certain trusts ?
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
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
Bianca,
Thanks for your comprehensive replies.
So how do you guys value income units at redemption time? cost + inflation? NPV?
What if they had the right intent initially, but had to sell out of the investment before it made a profit, for other unforseen reasons?
Is the best 'intent' in all of this, from the ATO perspective, to make a profit?
Thanks.
Thanks for your comprehensive replies.
So how do you guys value income units at redemption time? cost + inflation? NPV?
What if they had the right intent initially, but had to sell out of the investment before it made a profit, for other unforseen reasons?
Is the best 'intent' in all of this, from the ATO perspective, to make a profit?
Thanks.
Trusts & Deeds
Hi Guys
Oracle Wrote:
“..I am not trying to hijack the thread, but can somebody explain what's the difference between commercial deed and uncommercial deed??...”
A Commercial Deed is when the Deed allows for Commerciality of your investments such as the Deed cannot allow Income Units to be Redeemed at cost because one does not invest into something with the intention of making a loss or not making a profit. So if your Trust Deed states that the Income Units cannot make a profit than that is an Uncommercial Deed. Nor can it state that the Income Units will always be negatively geared. Many Hybrid Trust Deeds are written this way. So be careful when you buy a Hybrid Trust Deed off the shelf.
JIT Wrote
“So how do you guys value income units at redemption time? cost + inflation? NPV?”
At market value. So if the Assets of the Trust are predominantly property than its whatever the market value of the property is that will determine the value of the Units in the trust.
JIT also Wrote
“What if they had the right intent initially, but had to sell out of the investment before it made a profit, for other unforseen reasons? Is the best 'intent' in all of this, from the ATO perspective, to make a profit?
Many investments do not make a profit despite the fact that you went into them with a view to prosper and many people end up cutting their losses. Sometimes depending on circumstances you may need to cash out for whatever reasons.
The ATO simply states that you must have the intention to make a profit when entering into an investment and whether you do or not depends on the market conditions.
Hope this helps
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
Hi Guys
Oracle Wrote:
“..I am not trying to hijack the thread, but can somebody explain what's the difference between commercial deed and uncommercial deed??...”
A Commercial Deed is when the Deed allows for Commerciality of your investments such as the Deed cannot allow Income Units to be Redeemed at cost because one does not invest into something with the intention of making a loss or not making a profit. So if your Trust Deed states that the Income Units cannot make a profit than that is an Uncommercial Deed. Nor can it state that the Income Units will always be negatively geared. Many Hybrid Trust Deeds are written this way. So be careful when you buy a Hybrid Trust Deed off the shelf.
JIT Wrote
“So how do you guys value income units at redemption time? cost + inflation? NPV?”
At market value. So if the Assets of the Trust are predominantly property than its whatever the market value of the property is that will determine the value of the Units in the trust.
JIT also Wrote
“What if they had the right intent initially, but had to sell out of the investment before it made a profit, for other unforseen reasons? Is the best 'intent' in all of this, from the ATO perspective, to make a profit?
Many investments do not make a profit despite the fact that you went into them with a view to prosper and many people end up cutting their losses. Sometimes depending on circumstances you may need to cash out for whatever reasons.
The ATO simply states that you must have the intention to make a profit when entering into an investment and whether you do or not depends on the market conditions.
Hope this helps
Regards
Bianca
on behalf of Chan & Naylor Accountants
www.chan-naylor.com.au
Bianca,
What then happens when the trust later sells the property? Is the cost base for CGT still the original purchase price of the property or the price the units were redeemed for? If the former, then CGT will effectively be paid twice on the same gain.
Thanks.
GP
So if the unitholder redeems the units when the property has increased in value, then he will pay CGT on the gain.
What then happens when the trust later sells the property? Is the cost base for CGT still the original purchase price of the property or the price the units were redeemed for? If the former, then CGT will effectively be paid twice on the same gain.
Thanks.
GP
