HDT explanation for Dummies???

[Shadow]

SS,
Shadow,
For a HDT to provide all the benefits you list it would have to go from being a unit trust to a discretionary trust and run the guantlet of all the issues we have discussed.

Hi Julia... here we go again...

What issues? I've already explained there are no issues when a HDT is used correctly!

So it is not satisfactory to say use a HDT to make sure you have all the options covered. In some cases the options aren't covered as well as other methods.

It's not about having all the options covered as well as other methods. Other methods work for some of the options, but not all of the options. The HDT covers ALL of the options, and although it may not cover every single specific option as well as that specific option may be covered using another method, it does at least cover them all quite adequately.

And in other cases both sets of objectives cannot be achieved at the same time ie negative gearing and flexability. You cannot get to the stage of flexibility after negative gearing without crossing the CGT problem.

Why do you keep saying CGT is a 'problem'. CGT is a fact of life for all investors. CGT is incurred whether a property is sold individually, or out of a discretionary trust. You seem to imply that CGT only affects HDTs?

Flexibility does not mean doing everything at the same time. It means having the option to take different alternatives when the need arises. A HDT is inherently flexible. When the time comes, I can choose to...

a) Keep the Units, and let the portfolio become positive cash flow, streaming income to the Unit holder. The structure now works the same as if the properties had been owned in individual names.

b) Redeem the Units at Market Value, pay the GCT (CGT is not an issue, because I've already saved more in negative gearing up to that point). The structure now works the same as a Discretionary Trust.

c) Keep the units, buy more property and continue to run a negatively geared portfolio, living off equity. This way I get the best of both worlds... keep the negative gearing and no CGT event. Of course my plan would always be to eventually make a profit, if questioned by the ATO.

At the same time as I have these options, I also achieve the other benefits of holding assets in a trust structure (I won't list these out again, already discussed earlier).

Depending on your circumstances there is another method of having both negative gearing and flexibility at the same time ie salary sacrificing the rental property expenses.

Your other method does not suit everybody, the same way that the HDT does not suit everybody.

Your other method works OK for couples (not singles) who are comfortable with involving their employer in their investing plans, and the employers must also be agreeable to this plan.

HDT has a specific use for certain individuals in a particular circumstance, as does your salary sacrifice method.

Just as there are other methods of achieving the other benefits listed. True it does depend on what you are looking for but there is always another option than using a HDT so why go on the ATO radar.

There are other methods of achieving SOME of the benefits listed.

There is no other way to achieve ALL of the benefits under one structure.

Talking about ATO radar is meaningless. No tax is avoided when a HDT is used correctly. HDTs are not about tax avoidance, they are about holding your assets in a flexible trust structure with all the benefits that go along with that, while at the same time achieving the benefit of negative gearing that is rightfully allowed for all investors.

Cheers, Shadow.

 

[JIT]

b) Redeem the Units at Market Value, pay the GCT (CGT is not an issue, because I've already saved more in negative gearing up to that point). The structure now works the same as a Discretionary Trust.

I think Julia refers to the CGT on unit redemption. If you bought the IP in a DT to begin with you would not have to pay this redemption CGT, although on the other hand, you wouldn't have been able to negative gear either.

I think HDT users would aim to minimise this CGT on unit redemption by using a conservative estimation of market value of the 'special income units'.

GSJ

 

[Shadow]

I think Julia refers to the CGT on unit redemption. If you bought the IP in a DT to begin with you would not have to pay this redemption CGT, although on the other hand, you wouldn't have been able to negative gear either.

Hi GSJ... exactly, yes I agree a DT is better, if you don't want to negative gear.

I think HDT users would aim to minimise this CGT on unit redemption by using a conservative estimation of market value of the 'special income units'.
GSJ

This really comes down to how the user wishes to use the trust... there is no issue with the trust itself, but if the user creates a very contrived and conservative estimate of the market value for redemption, then this may be seen as an issue with how the user decides to use the trust.

In may cases, this situation will not arise for a long time, and in the meantime the user benefits from negative gearing, allowing the portfolio to grow more quickly.

And of course, the CGT situation never arises if the user chooses not to redeem the units, continues to run a negatively geared portfolio, and lives on equity.

Or the user might be happy to just let the portfolio become positive cashflow and have the income streamed to the unit holders - say in the case of a couple where both have retired... they may not care about discretionary income streaming.

The key point is that a HDT gives the user flexibility to make whatever investment decision is in his best interest at the time.

Cheers, Shadow.

 

[Mry]

If you could be persuaded or convinced that there is an explanation for this that does make commercial and financial sense...

If the ATO could be convinced, that's all that matters. For myself, I would be interested in an argument that states that it makes commercial and financial sense but I have a great deal of difficulty construing one.

Excuse my ignorance (not meaning to be rude here), but are these areas part of an accountant's area of expertise, or more that of a solicitor or financial planner or 'asset protection specialist'???

Accountants are amateur tax lawyers. We have just as much to deal with as a solicitor in business and taxation areas.

Hi Julia... you are missing the point. Yes, a DT does let you achieve most of the same benefits... but not the negative gearing. My point is the HDT lets you do everything under one structure.

Surely you must have realized by now that Julia does not agree with your position, and that you are continually bringing up your position when she raises your objections and that you can continue in this vein for several more pages. You have not sufficiently pointed out your proof or evidence in support of hybrids, neither case law, tax law or rulings, you are relying on the promises you have been made without support. If you have a problem with someone's tax interpretation, find the relevant cases and rulings, point out your position instead of saying "I have a firm belief that they work! So they do!" which gets old very quickly.

I'm not making money writing here, nor am I making money by advising of the problems with hybrids. I'm doing this because there are huge issues which have not been addressed.

who no answer about transfer asset to kids with no tax and cloning. i no see how salary sacrificing can do this. transfer to kids mean tax and stamp duty. not so with cloning.

Every structure has its benefits and issues. Your structure had that benefit, so congrats. A DT has significant long term benefits. But it doesn't offer negative gearing on purchase, so its not for everybody.

explain to me how u have negative gear property and be able to transfer to kids with no taxes.

Sure. Send me all your records and tell me where to send the bill.

There are other methods of achieving SOME of the benefits listed. There is no other way to achieve ALL of the benefits under one structure. Talking about ATO radar is meaningless. No tax is avoided when a HDT is used correctly.

I'm sure the person who applied for PBR 66298 was told the same thing. That ruling failed. Apply for your own PBR and tell me how yours goes.

If what you said was true, find me one accounting association that heralds the advent of hybrids with the same surety that you do. And then think about why they aren't. They are either clueless, or have done their own research and come to their own conclusions.

And I'm going to bring my participation in this thread to a close because its August and my time is very limited, I have made the arguments I needed to make and you just can't convince everybody using rational, supported arguments. But I promise you one thing - get your PBRs on your hybrids and when/if they are successful, I will come back and praise you. But if you don't bother applying for your PBRs, I will have to come to the conclusion that you don't have faith in your arguments.

 

[Shadow]

You have not sufficiently pointed out your proof or evidence in support of hybrids, neither case law, tax law or rulings, you are relying on the promises you have been made without support.

Hi Mry... I think I have. This proof is very simple. There can be no issue with a HDT when it is used correctly, because no tax is avoided.

If you have a problem with someone's tax interpretation, find the relevant cases and rulings, point out your position instead of saying "I have a firm belief that they work! So they do!" which gets old very quickly.

I don't have an issue with anyones interpretation. I think we are all on the same page here. I agree with you and Julia when you say that a poorly written HDT used incorrectly will cause problems with the ATO. Unfortunately some less informed people seem to think that all HDTs are the same.

I'm sure the person who applied for PBR 66298 was told the same thing. That ruling failed. Apply for your own PBR and tell me how yours goes.

Hmmm, that was the one about the poorly written deed that was used incorrectly, right?

If what you said was true, find me one accounting association that heralds the advent of hybrids with the same surety that you do. And then think about why they aren't. They are either clueless, or have done their own research and come to their own conclusions.

How about DaleGG, Chris Batten, Chan&Naylor, to name a few. All supportive of HDTs.

I agree that other accountants have come to their own different conclusion based on their own 'research' ... I wouldn't go so far as to call them clueless, perhaps just not well clued into how HDTs work. As I mentioned above, unfortunately some less informed people seem to think that all HDTs are the same. They don't realise that there is no ATO issue with a HDT when it is used correctly, because no tax is avoided.

The accountants who specialise in property have done their research and determined that there is no issue with a well written HDT when used correctly.

Cheers, Shadow.

 

[alexlee]

How about DaleGG, Chris Batten, Chan&Naylor, to name a few. All supportive of HDTs.

None of whom are associations. They are all firms / practices who make money from selling HDTs. They would all be members of either CPA or Chartered Accountant associations, neither of which has come out supporting HDTs.

I agree that many other accounting associations have come to their own different conclusion based on their own 'research' ... I wouldn't go so far as to call them clueless, perhaps just not well clued into how HDTs work. As I mentioned above, unfortunately some less informed people seem to think that all HDTs are the same. They don't realise that there is no ATO issue with a HDT when it is used correctly, because no tax is avoided.

The accountancy associations who specialise in property have done their research and determined that there is no issue with a well written HDT when used correctly.

Again, none of the above are ASSOCIATIONS. They are all members of the associations.
Alex

 

[Shadow]

None of whom are associations. They are all firms / practices who make money from selling HDTs. They would all be members of either CPA or Chartered Accountant associations, neither of which has come out supporting HDTs.

Again, none of the above are ASSOCIATIONS. They are all members of the associations.
Alex

Hi Alex, thanks, but I think others probably know what I meant. My point is that accountants who specialise in property have determined that well written HDTs used correctly are fine.

I haven't seen any 'ASSOCIATIONS' saying that there is a problem with well written and correctly used HDT deeds either.

Cheers, Shadow.

 

[geoffw]

How about DaleGG, Chris Batten, Chan&Naylor, to name a few. All supportive of HDTs.

However, Chris Batten does not support the same form of HDTs as proposed by Chan and Naylor. He has posted as such in this forum.

 

[Shadow]

However, Chris Batten does not support the same form of HDTs as proposed by Chan and Naylor. He has posted as such in this forum.

Hi Geoff... of course not... C&N are a competitor to Chris Batten.

Chris would have had the HDT market nicely wrapped up until C&N released a competing deed.

There is not much difference between the deeds. The main difference is that the C&N deed does not vest after 80 years, and they have trademarked the name, calling it a 'Property Investor Trust'.

Cheers, Shadow.

 

[alexlee]

Hi Alex, thanks, but I think others probably know what I meant. My point is that accountants who specialise in property have determined that well written HDTs used correctly are fine.

I haven't seen any 'ASSOCIATIONS' saying that there is a problem with HDTs either.

I didn't understand what you meant, and I AM an accountant. The opinions of a firm of accountants is certainly NOT the same as the opinion of the whole association. Wouldn't you think the institutes, who represent all its members, would tell all its members to go sell HDTs if they were as confident as the firms you listed above? I know that's what I pay my Institute fees for: for them to tell me about new developments.

The NTAA is the association for tax agents. What motive could they possily have for being unfavourable towards HDTs, given that their members would benefit from selling and managing them? Yet they are negative on HDTs:

http://www.ntaa.com.au/media/associationatwork/usinghybridtrusts.html

All your argument is based on is ONE ruling where the HDT passed (just as others have posted rulings where it didn't) and the opinions of a few firms. You are basically saying you trust your accountants to have the same opinion as the ATO with regards to HDTs. I only note that big firms get whacked for promoting tax schemes that subsequently get overturned in court. I have no doubt the firms you listed are full of smart people. However, in the realm of legal and ATO opinions, that doesn't always work.
Alex

 

[geoffw]

Hi Geoff... of course not... C&N are a competitor to Chris Batten.

Chris would have had the HDT market nicely wrapped up until C&N released a competing deed.

There is not much difference between the deeds. The main difference is that the C&N deed does not vest after 80 years, and they have trademarked the name, calling it a 'Property Investor Trust'.

I don't think that's a fair comment. Other accountants on the forum have supported each other's work. To imply that Chris doesn't like C&N's deed just because he is a competitor is casting doubt on someone's professional integrity, and such remarks should not be made lightly.

 

[Shadow]

The NTAA is the association for tax agents. What motive could they possily have for being unfavourable towards HDTs, given that their members would benefit from selling and managing them? Yet they are negative on HDTs:
http://www.ntaa.com.au/media/associationatwork/usinghybridtrusts.html

Hi Alex, please read the document again and pay attention to what it really says.

It refers to ways in which individuals can misuse HDTs, or use poorly written HDTs, in an effort to avoid tax, in which case they would quite rightly draw the attention of the ATO.

All your argument is based on is ONE ruling where the HDT passed (just as others have posted rulings where it didn't) and the opinions of a few firms. You are basically saying you trust your accountants to have the same opinion as the ATO with regards to HDTs.

No Alex, this is absolutely NOT what I am saying.

My argument is very very simple... I will say it again to see if you can understand...

A person who appropriately uses a well written Hybrid Discretionary Trust DOES NOT PAY ANY LESS TAX than someone who bought the same assets in their individual names, or someone who bought the same assets in a Discretionary Trust and then waited for the negative gearing to be offset against future income. Therefore, there is NO TAX AVOIDANCE.

Can you understand this yet Alex... I don't know how many times I have to repeat it!

Cheers, Shadow.

 

[alexlee]

A person who appropriately uses a well written Hybrid Discretionary Trust DOES NOT PAY ANY LESS TAX than someone who bought the same assets in their individual names, or someone who bought the same assets in a Discretionary Trust and then waited for the negative gearing to be offset against future income. Therefore, there is NO TAX AVOIDANCE.

I understand your argument, as does Mry and Julia (much better than I do, I'm sure). I just don't like your chances in front of the ATO because I think the ATO will disagree with you. To say that the ATO will rule in your favour, in view of the current conflicting rulings and absence of actual case law, is a gutsy call.
Alex

 

[Shadow]

I don't think that's a fair comment. Other accountants on the forum have supported each other's work. To imply that Chris doesn't like C&N's deed just because he is a competitor is casting doubt on someone's professional integrity, and such remarks should not be made lightly.

Hi Geoff,

The vast majority of accountants on this forum (possibly all of them) use Chris Batten's MGS HDT deed. So I would expect them all to support each other in the use of this deed.

If you check one of my earlier posts in this thread, I noted a statement that Chris made about the C&N deed that was totally incorrect and misleading. Chris never made any attempt to correct this statement, which has led to a lot of confusion on this forum about how the C&N deed actually works. I'm willing to accept that Chris just made a simple mistake here and forgot to correct it.

Perhaps Chris has many good reasons not to like the C&N deed, beyond the fact that C&N are a competitor. If that is the case I would welcome some direct comments here from Chris or other users of the MGS deed, comparing it to the C&N deed, pointing out the differences etc. But from what I have seen of both deeds, there is no significant difference in how they are constructed.

I don't want this to turn into a debate about the relative merits of each HDT deed. I don't have any issue with Chris or the MGS HDT deed or any of the other accountants on this forum. In my opinion they are all correct to support the MGS deed, same way as others are correct in their support of the C&N deed. My point is that HDTs in general are fine if they are well written and used correctly.

I think we can also agree that there are plenty of other deeds out there that are not so well written, and there are some people who choose to misuse their structure.

I also don't think it is unreasonable to suggest that most people who are running a business do not actively promote their competitors products.

Cheers, Shadow.

 

[Shadow]

I understand your argument, as does Mry and Julia (much better than I do, I'm sure). I just don't like your chances in front of the ATO because I think the ATO will disagree with you. To say that the ATO will rule in your favour, in view of the current conflicting rulings and absence of actual case law, is a gutsy call.
Alex

OK Alex, but the ATO does need to prove that tax was avoided, which it would find very difficult to do when no tax was actually avoided, but lets leave it at that.

Cheers, Shadow.

 

[alexlee]

You’re the one who has his deductions on the line if the ATO doesn’t rule in your favour.

I’m not doing this for you, since obviously I won’t convince you and you won’t convince me. I’m discussing this for the benefit of other forumites who are considering HDTs. I think they deserve an intelligent debate on the pros and cons, and the risks (which you don’t see but I do, just another point on which we disagree).
Alex

 

[Shadow]

You’re the one who has his deductions on the line if the ATO doesn’t rule in your favour.

I don't see any danger to my negative gearing deductions, because I would still claim these deductions had I purchased the property in my own name. So I have not claimed any more deductions than I would normally be entitled to.

I’m not doing this for you, since obviously I won’t convince you and you won’t convince me. I’m discussing this for the benefit of other forumites who are considering HDTs. I think they deserve an intelligent debate on the pros and cons, and the risks (which you don’t see but I do, just another point on which we disagree).
Alex

I certainly do see risks with using a poorly written deed, or misusing a deed.

And I also appreciate the chance to argue my point here... it is good to bring up counter-arguments as it causes me to think about the argument in more detail and construct an appropriate response, which usually increases the strength of my conviction!

Cheers, Shadow.

 

[julia]

Sorry guys,

I have the same problem as Mry time starved time of the year. So I will be brief.

If no tax is avoided so HDT not a problem with ATO then there is no tax advantage in having them and “operating them correctly”

Mry asked why there are no professional bodies ie CPAs, NTAAs CAs etc that support HDTs not why there are not accountants that support HDTs. Accounting bodies do not sell HDTs accountants do. So accounting bodies are less likely to be bias and considering their membership and research facilities hardly likely to be less informed.

SS,
If you were negatively gearing your HDT before you transferred the assets to a mirror trust I gather you redeemed the units first. Didn’t this trigger CGT anyway?

 

[Shadow]

If no tax is avoided so HDT not a problem with ATO then there is no tax advantage in having them and “operating them correctly”

Exactly Julia... HDTs are not about tax avoidance, they are about holding your assets in a flexible trust structure with all the benefits that go along with that, while at the same time achieving the benefit of negative gearing that is rightfully allowed for all investors. I think this is what a lot of people here don't seem to understand.

Cheers, Shadow.

 

[Mry]

I think this is what a lot of people here don't seem to understand.

Yes sorry about that. Our understanding is marred and corrupted by taxation law, case law, private rulings, tax rulings, university educations and professional opinions from operating for too many years as tax agents. If we were unfettered by such I am sure we would agree with you.