HDT not so rosy.

[DonkeyKong]

I set up HDT through an accountant after numerous email conversations with him and from reading posts in this forum. Just to cut it short, he had reassured me that the property asset is protected if I use HDT to purchase the investment property. I could also negative gear it at the same time. Being reassured, I finally setup the HDT through him and bought a property in the name of HDT. I was planning to add two more properties into the trust. After hearing his retirement, I decided to visit this forum for further update. There were various threads that sounds an alarm of the validity of this HDT structure.

I recently consulted one of his associate. I have learnt that the ATO has put a stop to the asset protection. ATO argued the unit holder must be the legal owner of the asset at market value in order for it to be negatively gear. This means the asset is subject to the possible future legal action. I don't know what to do now since keeping it running as it is will attract administration fees on a yearly basis with little benefit.

What should I do? I need an answer fast as I have two properties near its settlement date.

 

[Mry]

DonkeyKong, the ATO has had this position since the 4 June 1992. Refer to paragraphs 9-11. It is not a recent development.

Have you been asked to re-sign a special income unit application form? Most forms have the following statement in it "The holders of Special Income Units shall not have an entitlement to any part of the capital of the Trust Fund." This may mean that your assets are not exposed. Unfortunately, this also means that you are not entitled to negative gearing deductions under the explanation that has been given you.

I can't see your assets being exposed unless your trust deed or unit application form has given you rights to capital and not merely income.

This does raise issues of importance which you need answered by your accountant -
1 - Do I need to amend returns where I have claimed a negative gearing loss where I do not have rights to capital?
2 - Do I need a new application form for my units since I don't currently have those rights? (If you aren't currently given those rights?)
3 - If I get reissued new units, do I have to pay capital gains on the redemption of the SIUs?

As for the future, you should talk to your accountant about the implications, costs and benefits of structuring.

 

[DonkeyKong]

Mry, thanks for the information. As I said, HDT is not so rosy. I could not negatively gear the investment and have asset protection. I could choose either one of the benefit but not both. This was not what I (and many others) was being told before I had it setup.

Who else is in this same boat?

 

[Mry]

DonkeyKong, HDTs are a sore point here. It would be wise not to stir things up, or your last thread will go the way this thread goes as well. Your question is answered so unless someone else has another view or you have further questions, lets leave it there before we see page 1 of nine appear.

 

[soyabean]

Mry, thanks for the information. As I said, HDT is not so rosy. I could not negatively gear the investment and have asset protection. I could choose either one of the benefit but not both. This was not what I (and many others) was being told before I had it setup.

Who else is in this same boat?

Hi DonkeyKong,
What would you have chosen if you knew all the above prior to the decision of using HDT ? Could you have chosen anything else that would give you both -ve gearing and asset protection ? If yes then what I would like to know. If no then how "better" would it be compared to your current situation ? Thanks.
(I also have HDT)

 

[julia]

What would you have chosen if you knew all the above prior to the decision of using HDT ? Could you have chosen anything else that would give you both -ve gearing and asset protection ? If yes then what I would like to know. If no then how "better" would it be compared to your current situation ?

Soyabean,

Owning the property 1% in the name of the high income high risk spouse and 99% in the name of the low income low risk spouse would give you asset protection then the negative gearing could be achieved by the high income earner salary sacrificing all the rental property expenses which effectively means the high income earner gets to claim all of the cash flow expenses as a tax deduction, the high income earner's employer does no pay FBT because of the otherwise deductible rule.
This is based on a case dating back to 1993 and it has an ATO ruling to support it. It also provides better negative gearing benefits than a HDT but not quiet as much money for accoutants.

 

[DonkeyKong]

I would definately not setup HDT if I knew that I could not negatively gear and at the same time protecting my asset. Unfortunately, I have to sell my property in order to dump the HDT structure and loss out the stamp duty and paid CGT. If I don't, it will attracts an annual administration fee.

 

[Rolf Latham]

Hiya DK

just as an aside

What threat or potential threat is the asset(s) under ?

ta

Rolf

 

[soyabean]

Soyabean,

Owning the property 1% in the name of the high income high risk spouse and 99% in the name of the low income low risk spouse

Julia, we both work and our income are similar, what do you suggest ? Ta

" I have to sell my property in order to dump the HDT structure and loss out the stamp duty and paid CGT."
DonkeyKong, you did all that just to save the admin fee on the HDT of about 1-2 K a year ?

 

[jingo]

I set up HDT through an accountant after numerous email conversations with him and from reading posts in this forum. Just to cut it short, he had reassured me that the property asset is protected if I use HDT to purchase the investment property. I could also negative gear it at the same time. Being reassured, I finally setup the HDT through him and bought a property in the name of HDT. I was planning to add two more properties into the trust. After hearing his retirement, I decided to visit this forum for further update. There were various threads that sounds an alarm of the validity of this HDT structure.

I recently consulted one of his associate. I have learnt that the ATO has put a stop to the asset protection. ATO argued the unit holder must be the legal owner of the asset at market value in order for it to be negatively gear. This means the asset is subject to the possible future legal action. I don't know what to do now since keeping it running as it is will attract administration fees on a yearly basis with little benefit.

What should I do? I need an answer fast as I have two properties near its settlement date.

Hi DonkeyKong,

I am sorry to hear that the structure hasn't worked for you. I made a mistake two years ago in setting up a company to put an IP into. (This was my own independent decision, and I did not seek advise - silly me). I was unable to claim the loan interest against my own income.

Since then, however, we have restructured our loans so that the property in the company is neutrally geared. We managed to achieve this by paying out the business loan that was attached to the property. This means that in our situation, the income earnt from the property in the company will only be taxed at 30%.

I haven't put any more IP's into the company as I need to be able to claim the negative gearing against our P.A.Y.E income.

Perhaps you should go and visit your accountant again, and see what he can do. He may be able to clarify some of the concerns you have as well.

Just to add as well, the company adds a huge amount to my tax bill every year! My accountant charges around $1,200 to prepare the company account, (which only contains one IP) and only $100 to do the rest of our tax return which includes another 6 IP's and various other bits and pieces. I can't really work out why the company costs so much to administer. Add to that, each year I need to pay a fee to the government to assess whether the company is still solvent. This costs about $400!

I guess we all learn the hard way from our mistakes!!!!

All the best,

Regards Jason.

 

[alexlee]

DK, you've only got ONE property in the HDT, right? Just dust yourself off and get on with it. Hopefully it's not going to be your only IP. It'll become positively geared eventually.
Alex

 

[geoffw]

Can an HDT trust deed be amended to alter its function to a standard DT? That would give you asset protection without the neg gearing (if it can be done- and I don't know- I'm just asking the question).

Neg gearing losses can be carried forward until the trust starts earn a profit.

Or it's possible in a DT to have some other income earning functions- perhaps shares or a fund- to offset the property losses.

 

[julia]

Julia, we both work and our income are similar, what do you suggest ? Ta

"

Then I have to ask as Rolf has what is your asset protection needs. If you are both wage earners where do you consider you risk to be?

 

[Welcome]

Unfortunately, I have to sell my property in order to dump the HDT structure and loss out the stamp duty and paid CGT. If I don't, it will attracts an annual administration fee.

Crunch the numbers.... surely the annual admin fee is nothing compared to the stamp duty + CGT?

 

[soyabean]

Then I have to ask as Rolf has what is your asset protection needs. If you are both wage earners where do you consider you risk to be?

Julia, Let's say that we do other things, or both of us are in profession that can be considered risky hence asset protection is important. What do you suggest ?

 

[Rolf Latham]

Hiya

For self employed's, this might work ?

CAUTION...........Im not an acctant or a soli .


Run the business as a trust with a corp trustee.

Buy the assets in a normal DT.

The trading trustee can distrib to the holding trustee, thereby offseting the holding trustee gearing loss, and diverting income from the personal beneficiaries.

ta
rolf

 

[grossreal]

hi rolf latham
I am not an accountant nor a solicitor but my idea would be very similar.
in that you can't get the losses out of any trust but you can attach to a income producing entity and use the losses that way
so if a entity is positive say 100k and the loss entity is minus 100k you can distribute via a trust structure to make both neutral.
you could at one time do the same with liquidated companies but they changed the rules that the loss company must be in the related industry that made the profit.( one very good reason to buy paper liquidated companies)
but I digress.
remembering that this can be part of a structure there would be no real reason to sell out to put it into another entity you just have to restructure it to suit what you want to achieve.
by all means if you wish to sell to another entity is fine but there is a cost.
and you may find that if you attach to another entity that you will have more benefites.
just my little .002

 

[coastymike]

Rolf,

Works quite well. Just make sure you make the appropriate family trust elections and interposed entity elections and don't make distributions that will result in family trust distributions tax and all is good.

 

[Mry]

I discuss the trust issue in an article I wrote for my clients here for those interested in more info. Asset protection, negative gearing and income splitting - the perfect result for investors.

If you are a wage earner and want asset protection and negative gearing, you should be buying the property in your own name and using the gift and loan back strategy. It isn't as effective and requires more effort and extra funds to implement.

Most of the time, negative gearing and asset protection don't go together. You need to combine it with other strategies.

 

[JIT]

Just wondering...if you used a HDT structure, could you re-arrange it to act like a normal DT, hence trapping negative gearing losses?

Would this be an expensive process, with CGT and stamp duty payable, or could you do it more effectively?

Then, if you are, or become self-employed, used the approach Rolf mentions above?

Thanks.