... I wrote an article about some of these issues
here that I am still working on and haven't quite yet finished. ...
Hey Mry,
Thanks very much for the link. I did enjoy reading it but I have a question in regard to the section on "Redemption of the Units".
It states that if the units are redeemed at Cost then this will sink your ability to negative gear the units. I'm not so sure that one can be so black and white with such a statement in my humble layperson view.
There is no shortage of investors who have negative geared into Unit Type trusts including managed funds & commercial property trusts etc who have redeemed their units (after a year or so) at around cost or at a loss. For example, sometimes investments just don't perform as expected, they were purchased at the top of the market and then nosedived and the investor panicked, a unexpected need for the invested funds arose etc etc.
In fact I have lost count of the number of investors I have known over the years with negatived geared investments who have sold at a loss after only a year or so. As far as I'm aware the ATO never questioned their interest expense claims because they sold the units at a loss or around breakeven after only 1 - 2 years.
So if the HDT unitholder redeemed the units at around original Face value AND
proof was available to show that the underlying asset was in fact genuinely this value then I would find it unfair if the ATO denied any interest expense claims up to that date. This is assuming that the HDT trust deed is well written so that the unit holder has an absolute entitlement to the income.
Athough the Tax law doesn't seem to provide any clear method for valuation I vaguely recall reading something at one stage which stated that market value is based on what an independent buyer would be prepared to pay for the property or a value determined by the owner of the property/land as long as this can be supported (perhaps a sworn valuation and/or Gov't land valuation).
Further due to these types of discussions I imagine that there are a number of HDT unit holders (who have purchased property in the last couple of years) who are feeling increasingly nervous about this arrangement . So there could be situations where, for peace of mind, the unitholder wants to redeem the units and revert back to a discretionary trust arrangement and be prepared to have future losses locked up in the DT or find other ways to inject cash flow. If these properties were purchased at the top of the property boom (eg especially in parts of Sydney) then there is a chance that the underlying asset linked to the Units may in fact be less than or close to Face Value.
Of course the above situations will no doubt be the minority but all I'm getting at is that there can be genuine situations where redemption at cost or less could happen.
Then this leads to another issue. Some redemption forms state that the units can't be redeemed at less than Cost. So if for whatever reason the unit holder needs to redeem the units (assuming the redemption value must be at least at cost) and the underlying asset is worth less than its orginal value does this mean that the unitholder has made a Capital Gain?
Cheers - Gordon