You can hear Ed Chans thoughts on this subject here:
http://ds1.downloadtech.net/cn1086/audio/1426244024136-001.mp3
http://ds1.downloadtech.net/cn1086/audio/1426244024136-001.mp3
HDT explanation for Dummies???
- Thread starter Shuttergirl
- Start date
i read 66298 and it says Your circumstances require consideration of whether ‘apportionment of interest expenses is necessary’. This is because the units you intend to purchase in the trust do not have a fixed entitlement to capital and therefore do not have the features of ‘split property units’, ‘growth units’ or ‘other property units’ as described in IT 2684.
so maybe these other hybrids are like ones in 2684 and have fixed entitlement to capital and no apportionment need be done. seems though ato ok in it 2684 if u have one of the trusts they like. good case of having the right trust deed. the other example mry gave pbr has been updated to say it was really only discretionary trust and not hybrid as ruling says. ed chan says this to. i not ed client but he seems to maybe have right deed.
so maybe these other hybrids are like ones in 2684 and have fixed entitlement to capital and no apportionment need be done. seems though ato ok in it 2684 if u have one of the trusts they like. good case of having the right trust deed. the other example mry gave pbr has been updated to say it was really only discretionary trust and not hybrid as ruling says. ed chan says this to. i not ed client but he seems to maybe have right deed.
Thanks Ebbie, very interesting.
Mry,
With 66298, all the accountant had to do was say that the investment will become positively geared at some time in the future...isn't it??? Seems pretty foolish to tell the tax office that it would never become positively geared?!
Negatively geared properties/SIU's can certainly become positively geared, it might be a long time away in some cases, but if you paid down debt, interest rates dropped, rents increased, and you did some renovation work to the property itself...this is obviously quite conceivable, and hence 'commercially justifiable'...isn't it?
Ed Chan also says that in IT 2684 the tax office shows how to use hybrid trusts?
Is that so, anyone read this???
GSJ
There's nothing at all in the ruling that states that the property will remain negatively geared. I don't know where Ed is inferring that. The ruling doesn't even suggest such a thing as a reason for denying the application. The only thing Ed could probably be referring to is that the capital is discretionary and he may not have had enough time to give a full reply in his broadcast.
As for IT 2684 it tries to place a rational basis for claiming negative gearing losses for arrangements involving different types of units from particular trusts. It states that "An interest expense is not fully deductible in those cases where the expected return from the units, both income and capital growth, does not provide an obvious commercial explanation for incurring the interest." In other words, if you are making an income loss, you are probably doing so in the expectation of a capital growth gain. Eg You receive $8 in income, $6 in interest costs but you expect $4 in growth.
Since a HDT does split the income and capital rights up between unit holders and beneficiaries, they use the ruling as a guide to apportion interest. You have a tough time trying to convince the ATO that your goal is to produce income if they believe the scheme makes no commercial sense in their opinion.
Can't help but laugh at the title of this thread 'HDT explanation for Dummies'...and the 6 confusing and contradictory pages that have come out of this thread so far! Sorry 'dummies'
.Personally, my 'gut feeling' now is that we are making this HDT thing far more complicated than it actually is or needs to be, and this is what Dale has said several times in the past too.
GSJ
All right folks I declare upfront I am not an accountant. How about this scenario:
If HDT has taxable positive cash flow in day one then the HDT should be au faire? All right, lend interest free funds to HDT for deposit to buy IP. Borrow remaining funds in your personal names to buy units in HDT. HDT use interest free deposits and proceeds of SIUs to buy IP. HDT should be cashflow positive in year one.
Rentals - IP expenses - depreciation = taxable cashflow positive.
Cashflow positive distribution goes to SIU holders. So HDT has no tax.
Surplus remaining also returned to SIU holders for repayment of interest free loan. SIU gets negative gearing. Buy and Hold strategy for SIU so no CGT consideration until SIU personal situation can accommodate it, eg use offset tax concessionary contribution to SMSF. SIU will appreciate at notional CG based on refinancing value of underlying IP.
F
If HDT has taxable positive cash flow in day one then the HDT should be au faire? All right, lend interest free funds to HDT for deposit to buy IP. Borrow remaining funds in your personal names to buy units in HDT. HDT use interest free deposits and proceeds of SIUs to buy IP. HDT should be cashflow positive in year one.
Rentals - IP expenses - depreciation = taxable cashflow positive.
Cashflow positive distribution goes to SIU holders. So HDT has no tax.
Surplus remaining also returned to SIU holders for repayment of interest free loan. SIU gets negative gearing. Buy and Hold strategy for SIU so no CGT consideration until SIU personal situation can accommodate it, eg use offset tax concessionary contribution to SMSF. SIU will appreciate at notional CG based on refinancing value of underlying IP.
F
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I don't know a lot about this myself.
But I had thought that the main benefit of an HDT was to provide negative gearing. So if a trust has positive cash flow, there's perhaps no reason to use a standard discretionary trust.
Hi GW
The idea is not to be blatantly negatively geared and bordering to be forever negatively geared. It HDT is used properly and day one it is ATO's client, then the setup is not overtly tax driven. Meanwhile, negative gearing is still available. Not very clever but still get assets protection, etc. Just to show that HDT has its place.
F
The idea is not to be blatantly negatively geared and bordering to be forever negatively geared. It HDT is used properly and day one it is ATO's client, then the setup is not overtly tax driven. Meanwhile, negative gearing is still available. Not very clever but still get assets protection, etc. Just to show that HDT has its place.
F
Well haven’t you guys been busy! I don’t think it is that complicated unless you are trying to find excuses around the basic truth of why you are using a HDT.
Mry,
Thanks for coming to my defense in my absence and keep up the good work. Excellent research and tenacity. Glad you were the one burning the midnight oil on that one, I hope everyone appreciates the research you have done.
Gordon,
I agree market value is not that much of a complicated subject give or take a few $k which is not enough in itself to justify a HDT.
Shadow
Your advantages of a HDT
- Estate Planning - What do you mean? Is this because it is not part of your will once redeemed because nothing owned by you. How is this an advantage? It is easier to change your will than a HDT. IF you want flexibility in your estate a TT better, huge tax benefits if your heirs want to distribute to minors.
- Asset Protection - Achieved better by a DT
- Anonymity of Assets using Corporate Trustee Achieved better by a DT
- Flexibility – not until a DT after paying CGT which would not have applied if a DT in the first place.
- Negative Gearing – While ever negative gearing is applicable asset protection is
not.
- Land Tax Threshold (except NSW/VIC) – Why would a HDT be better than DT?
Disadvantage of a HDT
More expensive to run than holding the property in your own name yet asset protection from people suing you (not from tenants) is the same while HDT in Unit stage
CGT bill when decide to go to DT not to mention legal and accounting fees
Cost of winding up
On ATO radar
Possible problems with making a family trust election if trust makes a loss.
Mry,
Thanks for coming to my defense in my absence and keep up the good work. Excellent research and tenacity. Glad you were the one burning the midnight oil on that one, I hope everyone appreciates the research you have done.
Gordon,
I agree market value is not that much of a complicated subject give or take a few $k which is not enough in itself to justify a HDT.
Shadow
Your advantages of a HDT
- Estate Planning - What do you mean? Is this because it is not part of your will once redeemed because nothing owned by you. How is this an advantage? It is easier to change your will than a HDT. IF you want flexibility in your estate a TT better, huge tax benefits if your heirs want to distribute to minors.
- Asset Protection - Achieved better by a DT
- Anonymity of Assets using Corporate Trustee Achieved better by a DT
- Flexibility – not until a DT after paying CGT which would not have applied if a DT in the first place.
- Negative Gearing – While ever negative gearing is applicable asset protection is
not.
- Land Tax Threshold (except NSW/VIC) – Why would a HDT be better than DT?
Disadvantage of a HDT
More expensive to run than holding the property in your own name yet asset protection from people suing you (not from tenants) is the same while HDT in Unit stage
CGT bill when decide to go to DT not to mention legal and accounting fees
Cost of winding up
On ATO radar
Possible problems with making a family trust election if trust makes a loss.
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'???
GSJ
estate planning just not for when dead. i bought 50 acres dural in 1987 in discretionary trust. not negative geared so hybrid no issue. six year ago i trabsfer to children land. if done so in my name then tax bill of maybe $5M. capital gain was $20M. but i pay nothing. clayton utz do cloning and trustee changes. lots of work and cost lot of accounting and legal fees. maybe $100K but i save over $5M in tax. kids do pay tax when they sell but wonderful gift to them and they money from it. i perplexed why this not of benefit to people.
Hey SS,
I've really enjoyed your posts. You certainly have a way with words.
Trust cloning is a great thing and perfectly legal if done properly from what I understand. Great work on what you acheived with the gift of the dural land to your children.
It also seems to have great potential in some states for reducing land tax liabilities.
The following link from DBA Butler lawyers mentions a few interesting points about Cloning including ATO approval.
http://www.dbabutler.com.au/download/dba_newsletter_200607.pdf
Cheers - Gordon
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.
Why is it more expensive? If you're talking about the few hundred extra dollars to do the tax return each year and maintain the company registration, then I consider that to be an insignificant cost compared to an overall property portfolio.
There is no CGT event if you never redeem the units.
If you DO redeem the units, then you're no worse off from a CGT perspective than someone who held the property individually or in some other structure. So why do you consider this a negative?
Legal/Accounting fees are irrelevant - small change compared to an overall property portfolio.
Why would I want to wind up the trust.
C&N PIT does not vest after 80 years.
Even if you did wind it up, cost is insignificant compared to overall property portfolio.
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 Julia, can you please tell me where is the tax avoidance?
No tax is avoided when a HDT is used correctly!
You keep making up scenarios that many people would not encounter, and then stating that this is a reason why one should not use a HDT.
HDTs have a very specific use for people in certain circumstances. A properly written HDT deed, used appropriately, is a very useful and acceptable structure for certain individuals. They are not for everybody. There is no point in you saying 'well if you want to do X and Y, then it won't work with a HDT, so HDTs are all bad'.
HDTs are the right structure for some people, and the wrong structure for others.
Can you at least accept this point?
Cheers, Shadow.
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Hiya,
Wow. This thread certainly has been busy. Apologies if my absence has been conspicuous over the last few days... unfortunately for some (and less so for others), I do have a life outside of work that doesn't involve dispensing free advice
But, it has been a good weekend.
As these threads always seem to do, we have a group of people who think HDT's are fine and have their place, and some others who completely disagree. Again, as always, the thread appears to be going around in circles as neither side is willing to concede any ground.
Personally, I believe a big, big part of it all comes down to the wording of the deed in question. So, the MGS deed is different from the PIT which is different from any other deed written by someone else. As the assortment of PBR's released to date show, the results can vary substantially simply because not all deeds are written equal. As such, much of this discussion is rhetorical and not getting us anywhere.
(Now might also be a good place to clarify that when providing general answers on how a HDT works, I am generally referring to the MGS variety, and not a PIT or other deed)
I think most of the questions so far have been answered, in one way or another. Of course, let's keep this water running if I have missed something or another issue on the topic arises.
Cheers
James.
Wow. This thread certainly has been busy. Apologies if my absence has been conspicuous over the last few days... unfortunately for some (and less so for others), I do have a life outside of work that doesn't involve dispensing free advice
But, it has been a good weekend.
As these threads always seem to do, we have a group of people who think HDT's are fine and have their place, and some others who completely disagree. Again, as always, the thread appears to be going around in circles as neither side is willing to concede any ground.
Personally, I believe a big, big part of it all comes down to the wording of the deed in question. So, the MGS deed is different from the PIT which is different from any other deed written by someone else. As the assortment of PBR's released to date show, the results can vary substantially simply because not all deeds are written equal. As such, much of this discussion is rhetorical and not getting us anywhere.
(Now might also be a good place to clarify that when providing general answers on how a HDT works, I am generally referring to the MGS variety, and not a PIT or other deed)
I think most of the questions so far have been answered, in one way or another. Of course, let's keep this water running if I have missed something or another issue on the topic arises.
Cheers
James.
remember that accountants not lawyers as well. some are but not many. i remember steele case and many accountant running around saying interest capitalised. obviously one firm disagree because they take it to court. then won. because they think they right. then accountants go ohhhh yes we were wrong. so sometimes people wrong and sometimes right. when hybrid go to court then we know. in meantime just speculation and private rulings. even private ruling been wrong before. court is decider. then parliament if they dont like court rule.
SS,
Capitalised interest is deductible as long as your dominant purpose is not a tax benefit ie PBR69725
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. 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. 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. 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. 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.
Capitalised interest is deductible as long as your dominant purpose is not a tax benefit ie PBR69725
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. 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. 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. 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. 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.
julia and mry
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.
why do u answer only questions u like but not one u cant. explain to me how u have negative gear property and be able to transfer to kids with no taxes. i think people saying hybrid the way to get both benefits. ur arrangement is good for simple people but not complex. ur arrangement would have cost me $5m tax when i transfer to kids. i dont think that good.
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.
why do u answer only questions u like but not one u cant. explain to me how u have negative gear property and be able to transfer to kids with no taxes. i think people saying hybrid the way to get both benefits. ur arrangement is good for simple people but not complex. ur arrangement would have cost me $5m tax when i transfer to kids. i dont think that good.
