HDT explanation for Dummies???

[Mry]

Secret Squirrel, are you trying to troll here? Perhaps you could learn to be less offensive when making comments. I'd prefer to be right more than anything else. I picked up two technical errors when I read one of Ed Chan's books. Making money is a measure of success, but it is a poor measure of success.

By the way, you should be out making money than wasting your time posting on forums.

 

[julia]

James,

Dale’s article says:
“Redemption on the special income units in a hybrid trust, then should logically mean the units are bought back at their market value for tax purposes, regardless of the price paid for those units initially.”

 

[austini]

Hi Gang,

Numerous methods for determining the Market value of the HDT Units have been suggested but assuming the asset we are dealing with is real estate there has been no comment on the the method I posted about earlier:

"In Taxation Determination TD 10, the Commissioner stated that where the "market value" of an asset needs to be determined for CGT purposes, taxpayers can choose to:

Obtain a detailed valuation from a qualified valuer; or
Compute their own valuation based on reasonably objective and supportable data."

I suppose this would be the most painful option in terms of the CGT payable.

Accounting always was my worst subject at Uni but all the methods mentioned so far seem to ignore the Market Value of the actual asset the HDT income units are linked to

Cheers - Gordon

 

[alexlee]

"In Taxation Determination TD 10, the Commissioner stated that where the "market value" of an asset needs to be determined for CGT purposes, taxpayers can choose to:

Obtain a detailed valuation from a qualified valuer; or
Compute their own valuation based on reasonably objective and supportable data."

I suppose this would be the most painful option in terms of the CGT payable.

Accounting always was my worst subject at Uni but all the methods mentioned so far seem to ignore the Market Value of the actual asset the HDT income units are linked to

That's because the units do not actually represent ownership of the asset. Listed property trusts don't always trade at their NTAs, either. It's the usual 'general' rule that the ATO uses to avoid people poking holes through it. Easy to run around a brick wall. Far harder to run around a net that's spread everywhere.
Alex

 

[austini]

That's because the units do not actually represent ownership of the asset. Listed property trusts don't always trade at their NTAs, either. ...Alex

Thanks Alex,

Of course in the case of LPTs they are valued by the share market. However given a HDT is unlisted wouldn't it be more accurate to compare it to an "Unlisted" property trusts where I thought the unit value was representative of the underlying asset value. However I haven't had much to do with unlisted PTs for a long time so I may be wrong.

Cheers -Gordon

 

[JIT]

That's because the units do not actually represent ownership of the asset. Listed property trusts don't always trade at their NTAs, either. It's the usual 'general' rule that the ATO uses to avoid people poking holes through it. Easy to run around a brick wall. Far harder to run around a net that's spread everywhere.
Alex

If people invest as unit-holders in LPT's for commercial property, and they are negatively geared, then sell out of their LPT's for whatever reason, they may only make a small capital gain, or none at all...I'm sure this happens a lot, and if this is OK with the ATO, then isn't negative gearing with SIU's in a HDT for residential property really the same thing???

In both cases you are investing primarily for an income stream, with some small to moderate prospect of capital growth, that will at least keep up with inflation.

Commercial property is great for income and also providing some capital gain, but not necessarily a lot. The real benefit is that the income is relatively high and should keep up with inflation.

The SIU's, although effectively invested in residential property here in the HDT example, will still provide an income, but not as great as commercial property. If the SIU's are redeemed at a price that keeps up with CPI that seems to make some sense...and furthermore, if this redemption only occurs at a time when you become positively geared, it makes even more sense...doesn't it?

Any thoughts on this???

GSJ

 

[JIT]

For some unlisted commercial property trusts they have a facility where you can have a limited level of liquidity and you can have your units redeemed before the end of the fixed-term investment period.

In these cases how do they calculate the redemption price of the units???

GSJ

 

[alexlee]

If people invest as unit-holders in LPT's for commercial property, and they are negatively geared, then sell out of their LPT's for whatever reason, they may only make a small capital gain, or none at all...I'm sure this happens a lot, and if this is OK with the ATO, then isn't negative gearing with SIU's in a HDT for residential property really the same thing???

My opinion only: where the entities are arms-length, and/or the entity is listed and buyers and sellers are unrelated, there is a presumption that the price is 'fair' (since you wouldn't deliberately lose money to an unrelated party). However, where the entities are related and the sale is not at arms length (you and the trust you control would not be arms length) there is greater onus on the parties to satisfy the ATO that the price is fair, because there is that 'private' element. Hence why the ATO generally doesn't allow people to rent and live in a property from their family trust, say, even if the rent is at market, and still get deductions.

The SIU's, although effectively invested in residential property here in the HDT example, will still provide an income, but not as great as commercial property. If the SIU's are redeemed at a price that keeps up with CPI that seems to make some sense...and furthermore, if this redemption only occurs at a time when you become positively geared, it makes even more sense...doesn't it?

Maybe you can use alternative methods like discounted cashflows or something. However, I'm not game to test it myself. It's not a matter of whether it makes sense or not: it's how the ATO perceives it. And the ATO generally doesn't like non-arms length transactions unless their hands are tied by legal precedent: e.g. arguably family trusts aren't arms length considering some of the things you can do with it, but it has so much legal precedent and political support that the ATO won't touch it.
Alex

 

[alexlee]

For some unlisted commercial property trusts they have a facility where you can have a limited level of liquidity and have you units redeemed before the end of the fixed-term investment period.

In these cases how do they calculate the redemption price of the units???

GSJ

They have their own terms, I'm sure, often at the detriment to the unit-holders. But in that case, the trust usually has a fixed life (or at least after a period requires agreement to renew) and my view is that because those are arms length transactions, the ATO is less likely to pursue them. After all, if the taxpayer wants to deliberately lose money to an unrelated party, who is the ATO to stop them? If I want to throw money out the window that's my business. However, if the ATO views it as benefiting a related party to avoid taxes.......
Alex

 

[JIT]

Thanks Alex, I see what you're saying re. 'arms length' transactions...

Another thing that makes sense about it though is that if you redeem SIU's at a time before the investment runs its course and the property is sold by the trustee, it may be justifiable to have a low redemption price for the SIU's as you are dealing with an illiquid investment.

James, did you have any thoughts on these things?

HDT proponents have made this comparison with buying units in managed funds, property trusts etc...but is it a valid one? Is it 'arms length'?

GSJ

 

[alexlee]

My reading is that when the buying and selling entites are not related, the ATO assumes the sale to be at a 'fair' price. However, where the entities are related the ATO would scrutinise it for 'fairness'.

I haven't researched this in detail, but for example, that ACR thing where the wife of a director purchased a company for a few hundred when properties in the company were worth millions. Would the seller be deemed to have disposed of the shares at market and have to pay CGT?
Alex

 

[bene313]

Hi GSJ

The other thing to remember is, as I understand (someone can correct me) that the loan used to purchase the units in the trust is secured against the property. From what I understand, the loan is not secured against the value of the units.

So, the ATO will look at the commerciality of the arrangement. You could get a better return from investing in the property in your own name seeing as you get the rights to asset growth. You can argue that the arrangement is for asset protection (which will mean Part IVA won't apply) but the ATO can still apply Fletcher's case to apportion the interest.

I'm not necessarily against HDTs. But I'm certainly not sure about them. Still no one has addressed my concerns posted previously in this thread.

Cheers

Ben

 

[Shadow]

Hi Julia... you still don't seem to understand the benefits of a HDT? How about...

- Estate Planning
- Asset Protection
- Anonymity of Assets using Corporate Trustee
- Flexibility
- Negative Gearing
- Land Tax Threshold (except NSW/VIC)

I have a Property Investor Trust Deed from Chan & Naylor.

The PIT has another advantage in that it does not vest after 80 years.

I have read the deed carefully together with Dale's recent article in API magazine.

I could see no issues with the PIT deed or any areas in which it may break the rules identified by Dale.

I also researched this very carefully before I decided to purchase the PIT deed. There is no inherent issue with correctly written HDTs. Issues only arise when people misuse deeds, or use poorly written deeds. I think this is what Dale stated quite clearly in his recent article.

If you 'plan' to sell your property, but never quite get around to it, then you don't trigger a Capital Gains Tax event. Many investors here are of the buy&hold variety.

For the ATO to have any issue it needs to prove that tax was avoided. If used correctly, a buy&hold investor with a HDT does not pay any less tax than would be the case if they bought the property in their own name. Alternatively if they bought the property in a Discretionary Trust, then the negative gearing is quarantined in the trust to be off-net against future income.

So in both these alternative structures (i.e. personal names and discretionary trust), the exact same amount of tax is ultimately payed to the ATO as would be payed under a HDT.

So where is the tax avoidance?

Seems fine to me.

Cheers, Shadow.

 

[alexlee]

Hi Julia... you still don't seem to understand the benefits of a HDT? How about...

- Estate Planning
- Asset Protection
- Anonymity of Assets using Corporate Trustee
- Flexibility
- Negative Gearing
- Land Tax Threshold (except NSW/VIC)

I can use a family trust and get all of the above EXCEPT negative gearing. What I'm questioning is why I would choose a HDT over a discretionary trust. Yes, I can negative gear using a HDT, but I also have CGT payable when I redeem the units, whereas I wouldn't have that if I used a discretionary trust.

I have read the deed carefully together with Dale's recent article in API magazine.

I could see no issues with the PIT deed or any areas in which it may break the rules identified by Dale.

I also researched this very carefully before I decided to purchase the PIT deed. There is no inherent issue with correctly written HDTs. Issues only arise when people misuse deeds, or use poorly written deeds. I think this is what Dale stated quite clearly in his recent article.

Did your research include a private ruling from the ATO?

If you 'plan' to sell your property, but never quite get around to it, then you don't trigger a Capital Gains Tax event. Many investors here are of the buy&hold variety.

We're discussing the CGT payable on the redemption of the UNITS. The redemption of the units is a CGT event, regardless of what you do with the IPs.

For the ATO to have any issue it needs to prove that tax was avoided. If used correctly, a buy&hold investor with a HDT does not pay any less tax than would be the case if they bought the property in their own name. Alternatively if they bought the property in a Discretionary Trust, then the negative gearing is quarantined in the trust to be off-net against future income.

So in both these alternative structures (i.e. personal names and discretionary trust), the exact same amount of tax is ultimately payed to the ATO as would be payed under a HDT.

With HDT you're trying to get the best of both individual name (-ve gearing) and trusts (asset protection). IF the ATO lets you.
Alex

 

[Mry]

Hi Julia... you still don't seem to understand the benefits of a HDT? How about...

- Estate Planning
- Asset Protection
- Anonymity of Assets using Corporate Trustee
- Flexibility
- Negative Gearing
- Land Tax Threshold (except NSW/VIC)

Julia more than understands the claims that HDTs offer, she just can't find any support for the claim of Negative Gearing without giving the units rights to the capital of the trust. Neither can I.

I have read the deed carefully together with Dale's recent article in API magazine. I could see no issues with the PIT deed or any areas in which it may break the rules identified by Dale. I also researched this very carefully before I decided to purchase the PIT deed. There is no inherent issue with correctly written HDTs.

Bold statements. Please lodge a PBR with the ATO to prove this treatment as you have described and share the results with us.

For the ATO to have any issue it needs to prove that tax was avoided.

PBR 66298 did not reference Part IVA and it failed. Woops. Poorly written deed? I would recommend you look at your application to the special income units, specifically where it references that you have no rights to capital, and then read the ruling where it references apportionment being necessary because the capital remains discretionary. The person in the ruling didn't help themselves in referencing asset protection, but the ATO still considered apportionment necessary anyway. I don't see how anyone who has carefully considered these issues and the lack of confirmation from the ATO could make the statements you have.

 

[Shadow]

I can use a family trust and get all of the above EXCEPT negative gearing. What I'm questioning is why I would choose a HDT over a discretionary trust. Yes, I can negative gear using a HDT, but I also have CGT payable when I redeem the units

I would not want to redeem the units if my plan was to always have a negatively geared portfolio, never sell, and live off equity.

whereas I wouldn't have that if I used a discretionary trust.

You will still pay CGT if you sell property from a discretionary trust.

Did your research include a private ruling from the ATO?

There are already enough private rulings out there stating that HDTs are fine if used correctly. I don't see why I would need another one.

We're discussing the CGT payable on the redemption of the UNITS. The redemption of the units is a CGT event, regardless of what you do with the IPs.

And if I never sell the property, and never redeem the units...

 

[alexlee]

I would not want to redeem the units if my plan was to always have a negatively geared portfolio, never sell, and live off equity.

You will still pay CGT if you sell property from a discretionary trust.

Yes, but I'm not talking about selling the properties. I'm talking about the CGT aspects of the UNITS.

There are already enough private rulings out there stating that HDTs are fine if used correctly. I don't see why I would need another one.

And what about the ones that day it's not? (Such as the one Mry quoted?)

And if I never sell the property, and never redeem the units...

And if you never redeem the units, all the tax gains (rent, etc) go to the unit holder (that would be you). So you lose the streaming aspect. What's the advantage of doing that?
Alex

 

[Shadow]

Bold statements. Please lodge a PBR with the ATO to prove this treatment as you have described and share the results with us.

Why? There are enough PBRs out there that say HDTs are fine if used correctly.

I would recommend you look at your application to the special income units, specifically where it references that you have no rights to capital

What makes you think the deed says this? The deed does not say this.

I don't see how anyone who has carefully considered these issues and the lack of confirmation from the ATO could make the statements you have.

Well, I guess because the deed does not say what you seem to think it says... that's why!

Cheers, Shadow.

 

[alexlee]

Why? There are enough PBRs out there that say HDTs are fine if used correctly.

Shadow, can you give me some references? I'd be interested in reading them.
Alex

 

[JIT]

I have a Property Investor Trust Deed from Chan & Naylor.

The PIT has another advantage in that it does not vest after 80 years.

Hi Shadow,

Just curious, from your research, what else do you think makes the PIT better than a HDT?

My understanding was that the PIT allowed discretionary distribution of rental income to lower taxed beneficiaries before you became positively geared and while SIU's were on issue...this was from the old PIT threads on the forum...I might be wrong...but is this still what C&N are saying???

The PBR's on HDT's would suggest that this is not a good idea...???

Thanks,

GSJ