I have an “interesting” HDT problem. My wife and I are trustees of a HDT. To keep the post readable, below is a somewhat simplified version of what happened.
a. HDT decided to purchase an old IP and rent it out. HDT obtained the funds to buy the IP by issuing SIUs to me.
b. SIU holder (me, the high income earner) provided 100% of the funds to acquire the asset. All nett rental income then went to the SIU holder, per trust deed. Interest payments were deductible.
c. HDT saw an opportunity to add value by demolishing the old house and building three new townhouses on the site. HDT beneficiaries (mainly my wife) carried out market analysis and feasibility study to confirm the numbers will work. The HDT issued further SIUs to fund construction costs.
d. Same SIU holder (me) provided 100% of the funds needed for construction.
e. Project completed successfully in late 2004, with numbers greatly exceeding feasibility values (coincided with early part of boom in Perth)
f. Since completion, capital growth has been quite high, largely due to high capital growth in Perth in the years 2004-2006.
My view is that the capital gain is attributable to two different “mechanisms”:
1. Increase in value of the unimproved land (in line with how the particular market performed in the area where the land is located) e.g. about 25% pa over last few years.
2. Increase due to value added by developing new properties — this would be a substantial contribution to increase in value as it included very high growth period (2004-2006 in Perth).
The “interesting” problem I was referring to relates to apportioning capital gain on redemption of the SIUs in the future. I believe it is clear that the SIU holder should benefit from CG attributable to the first mechanism above (conventional “natural” growth). But the key question which I’m struggling to answer is: Should the SIU holder benefit from the CG attributable to the second mechanism? The following points need to be considered.
1. The intention behind the HDT’s decision to add value by developing was that HDT (discretionary) beneficiaries (children ++) will benefit in the future from the value-adding exercise.
2. The initial idea, concept, subsequent development approval, project management and execution expertise was provided mainly by my wife (she was full time on this from initial IP search to completion of development), and myself to a much smaller extent (too busy at the day job--I helped mainly by adding a stern voice when I thought it was needed with recalcitrant tradies—didn’t help much!).
I feel the SIU holder (ignore the fact that it is me) is not entitled to claim benefit for the ideas and work of the HDT -- the HDT trustees are charged with the job of operating the trust in the best interests of the beneficiaries? Has anyone else on the forum used a HDT in this manner (or a UT/HDT combination)?
a. HDT decided to purchase an old IP and rent it out. HDT obtained the funds to buy the IP by issuing SIUs to me.
b. SIU holder (me, the high income earner) provided 100% of the funds to acquire the asset. All nett rental income then went to the SIU holder, per trust deed. Interest payments were deductible.
c. HDT saw an opportunity to add value by demolishing the old house and building three new townhouses on the site. HDT beneficiaries (mainly my wife) carried out market analysis and feasibility study to confirm the numbers will work. The HDT issued further SIUs to fund construction costs.
d. Same SIU holder (me) provided 100% of the funds needed for construction.
e. Project completed successfully in late 2004, with numbers greatly exceeding feasibility values (coincided with early part of boom in Perth)
f. Since completion, capital growth has been quite high, largely due to high capital growth in Perth in the years 2004-2006.
My view is that the capital gain is attributable to two different “mechanisms”:
1. Increase in value of the unimproved land (in line with how the particular market performed in the area where the land is located) e.g. about 25% pa over last few years.
2. Increase due to value added by developing new properties — this would be a substantial contribution to increase in value as it included very high growth period (2004-2006 in Perth).
The “interesting” problem I was referring to relates to apportioning capital gain on redemption of the SIUs in the future. I believe it is clear that the SIU holder should benefit from CG attributable to the first mechanism above (conventional “natural” growth). But the key question which I’m struggling to answer is: Should the SIU holder benefit from the CG attributable to the second mechanism? The following points need to be considered.
1. The intention behind the HDT’s decision to add value by developing was that HDT (discretionary) beneficiaries (children ++) will benefit in the future from the value-adding exercise.
2. The initial idea, concept, subsequent development approval, project management and execution expertise was provided mainly by my wife (she was full time on this from initial IP search to completion of development), and myself to a much smaller extent (too busy at the day job--I helped mainly by adding a stern voice when I thought it was needed with recalcitrant tradies—didn’t help much!).
I feel the SIU holder (ignore the fact that it is me) is not entitled to claim benefit for the ideas and work of the HDT -- the HDT trustees are charged with the job of operating the trust in the best interests of the beneficiaries? Has anyone else on the forum used a HDT in this manner (or a UT/HDT combination)?
