HDT not so rosy.
- Thread starter DonkeyKong
- Start date
Julia mentioned there was a way we could have both -ve gearing and asset protection (just as people who opted for HDT was hoping for) without having to use HDT. I take it that Julia's solution only works for family with one high income and one much smaller or staying home partner and won't be any help to my situation.
Understood the HDT--->DT etc . Our "business" is under another DT but is not generating enough income to pour into the HDT for balancing the loss. We need -ve gearing (from both our wages).
Our 3 reasons for having HDT are:
1./use the UT part for -ve gearing
2./ use the DT part so that I can pass the properties to my children seamlessly (by just changing trustee /director of company trustee) ;and
3./for asset protection.
Now I understand with HDT it is not posible to have -vegearing and asset protection at the same time, but can HDT still give us 1 and 2 ?
Guess I urgently need a portfolio of high income managed funds/ /LICs to affset the loss (area which I don't know much about) and I don't have good past experience with fin planner. What should I do ?:
Thank you.
Understood the HDT--->DT etc . Our "business" is under another DT but is not generating enough income to pour into the HDT for balancing the loss. We need -ve gearing (from both our wages).
Our 3 reasons for having HDT are:
1./use the UT part for -ve gearing
2./ use the DT part so that I can pass the properties to my children seamlessly (by just changing trustee /director of company trustee) ;and
3./for asset protection.
Now I understand with HDT it is not posible to have -vegearing and asset protection at the same time, but can HDT still give us 1 and 2 ?
Guess I urgently need a portfolio of high income managed funds/ /LICs to affset the loss (area which I don't know much about) and I don't have good past experience with fin planner. What should I do ?:
Thank you.
That would require a lengthy discussion on PSI and PSB views.
In short, no.
*sigh*, and now its two pages.
The main benefit of the HDT is Flexibility. No other structure allows the user so much flexibility to modify their structure in the future to best meet their needs.
For example, when the time comes, the HDT user can choose to...
a) Keep the Units, and let the portfolio become cash flow positive, streaming all income to the Unit holder. The structure now operates the same as if the properties had originally been purchased in the user's personal name.
b) Redeem the Units at Market Value and pay the relevant Capital Gains Tax. The structure now operates in the same way as a normal Discretionary Trust and income can be streamed as appropriate.
c) Keep the units, buy more property and continue to run a negatively geared portfolio, living off the equity. This way you get the best of both worlds... you keep the negative gearing benefit and there is no CGT event, so it does not matter that the Units are worth 'market value'. (Of course, if ever questioned by the ATO, your aim should be to eventually make a profit).
At the same time as the HDT provides this flexibility, it also provides many other benefits, such as:
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
Julia's alternative structure also mentioned in this thread would be appropriate for a limited number of people in very specific circumstances. It works OK for couples, where one parter is highly paid and the other is on lower pay, who are also comfortable with involving their employer in their investing plans, and whose employers must also be agreeable to this plan. It does not work for everybody.
In the same way, I acknowledge that the HDT does not work for everybody. If Asset Protection is important to you, then the HDT is not the best solution. However for most people in low-risk professions, asset protection is not very important. Insurance, not asset protection, is what most people in low-risk professions require.
So for everyone who requires the flexibility and other benefits mentioned above, the HDT is still the only structure that really works. There is no other way to achieve all of these benefits under one structure.
Cheers,
Shadow.
For example, when the time comes, the HDT user can choose to...
a) Keep the Units, and let the portfolio become cash flow positive, streaming all income to the Unit holder. The structure now operates the same as if the properties had originally been purchased in the user's personal name.
b) Redeem the Units at Market Value and pay the relevant Capital Gains Tax. The structure now operates in the same way as a normal Discretionary Trust and income can be streamed as appropriate.
c) Keep the units, buy more property and continue to run a negatively geared portfolio, living off the equity. This way you get the best of both worlds... you keep the negative gearing benefit and there is no CGT event, so it does not matter that the Units are worth 'market value'. (Of course, if ever questioned by the ATO, your aim should be to eventually make a profit).
At the same time as the HDT provides this flexibility, it also provides many other benefits, such as:
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
Julia's alternative structure also mentioned in this thread would be appropriate for a limited number of people in very specific circumstances. It works OK for couples, where one parter is highly paid and the other is on lower pay, who are also comfortable with involving their employer in their investing plans, and whose employers must also be agreeable to this plan. It does not work for everybody.
In the same way, I acknowledge that the HDT does not work for everybody. If Asset Protection is important to you, then the HDT is not the best solution. However for most people in low-risk professions, asset protection is not very important. Insurance, not asset protection, is what most people in low-risk professions require.
So for everyone who requires the flexibility and other benefits mentioned above, the HDT is still the only structure that really works. There is no other way to achieve all of these benefits under one structure.
Cheers,
Shadow.
I totally disagree Shadow.
I know there is the refinancing principle but for those who continue to invest, new loans will be deductible anyway.
If you are worried about poison property or anonymity, buy the property in a UT with a corporate trustee and then sell the units later to a DT or to your super fund.
I'm still a little freaked out that people have been claiming interest up to this point, and then get told that they have to have capital rights associated with the units to claim the interest - who have been claiming interest the entire time. Where are the letters to clients with these HDTs telling them of the new development?
That's like owning it your own name, less a fortune in accounting fees. This is an advantage?
Isn't it clear by now that HDT as a structure for people is just not worth it if the payment of capital gains when the units are disposed of is based on market value? You could actually own it in your own name, and then sell the asset into a trust at that point for the same amount of capital gains (if market value is being used based on the value of the property) and just pay stamp duty at that point, the only additional cost for people not in a trust (who would have paid for the trust and tax returns to be done up to that point). You could roll the stamp duty into the new loan for the property when you sell it into a basic discretionary trust during your refinance and have more cash in the intervening period. Cash flow is king for investors, and if they aren't getting the bang for their buck through tangible benefits, what's the point?
Again that's like owning the property in your own name less a fortune in accounting fees, without the worry of the ATO canceling my tax benefits under TR 95/33 which is still a concern.
I know there is the refinancing principle but for those who continue to invest, new loans will be deductible anyway.
If you are worried about poison property or anonymity, buy the property in a UT with a corporate trustee and then sell the units later to a DT or to your super fund.
I'm still a little freaked out that people have been claiming interest up to this point, and then get told that they have to have capital rights associated with the units to claim the interest - who have been claiming interest the entire time. Where are the letters to clients with these HDTs telling them of the new development?
Just to add, Batten isn't the only 'high profile' accountant selling the HDT, there's also Chan and Naylor, through their PIT.
They seem to take things a couple of steps further though, but no signs of them slowing down their promoting yet...
Have these guys just missed the plot here and got it mostly wrong...or do they know something we don't OR know it better than the rest of us??
They seem to take things a couple of steps further though, but no signs of them slowing down their promoting yet...
Have these guys just missed the plot here and got it mostly wrong...or do they know something we don't OR know it better than the rest of us??
Of course you do. I know you don't like HDTs. You don't see the benefit.
A fortune? A few thousand dollars out of a multi-million dollar property portfolio growing by hundreds of thousands of dollars a year? Accounting fees are irrelevant.
No. Because HDTs provide a level of flexibility that is not possible with any other structure. A CGT event only occurs when one of the possible options is selected. Without the HDT you don't even get these options. Anyway, why do you have a problem with CGT. CGT is a normal part of life for investors. If you buy the property in your own name, or in a Discretionary Trust, and then sell, you're still up for CGT, so why is CGT such a big issue in your opinion for HDTs in particular? The main benefit of a HDT is flexibility, not CGT avoidance.
Cheers,
Shadow.
Hi JIT,
I believe that Chris Batten and Chan&Naylor probably know more about HDTs that most others on this forum. They have both been through countless reviews and assessments with the ATO. The ATO know very well that both these organisations market and sell HDTs... wouldn't they have said something if they had any major issue with their HDTs.
I would tend to follow advice from Chris Batten and Chan&Naylor before the other tax experts on this forum...
Cheers,
Shadow.
Call me old fashioned, uninformed, whatever. I'm going to stick to owning in my own name and in discretionary trusts. Too many things about HDTs are still open to interpretation for my liking.
HDTs was viewed as a structure where you can achieve negative gearing AND have all the advantages of discretionary trusts (income distribution to different people and entities, asset protection). Now, it seems that you either get one or the other. To me, that's like choosing between owning in your own name and owning in a DT, both of which have far more legal precedent than HDTs. I know exactly what I'm getting by owning in my own name or in a DT, but the last couple of months has seen the potential uses of HDTs turned on its head.
Make up your own minds, but ask yourself: it may well be the case that HDTs are unable to achieve both negative gearing and asset protection / income streaming. This is very different to what many understood to have been the function of HDTs. What else is yet to be decided by the ATO? If the HDT cannot achieve both negative gearing and asset protection / income streaming, is it worth it to take the risk of all the other things that might still be 'viewed' by the ATO? Remember the HDT is a very specific structure that can be attacked by the ATO, probably with few political consequences. Compare this to, say, the ATO saying you now have to quarantine property losses owned personally.
I'm the type to prefer a tried and true model than the new-fangled thing that might work wonders......or blow up in your face.
Alex
HDTs was viewed as a structure where you can achieve negative gearing AND have all the advantages of discretionary trusts (income distribution to different people and entities, asset protection). Now, it seems that you either get one or the other. To me, that's like choosing between owning in your own name and owning in a DT, both of which have far more legal precedent than HDTs. I know exactly what I'm getting by owning in my own name or in a DT, but the last couple of months has seen the potential uses of HDTs turned on its head.
Make up your own minds, but ask yourself: it may well be the case that HDTs are unable to achieve both negative gearing and asset protection / income streaming. This is very different to what many understood to have been the function of HDTs. What else is yet to be decided by the ATO? If the HDT cannot achieve both negative gearing and asset protection / income streaming, is it worth it to take the risk of all the other things that might still be 'viewed' by the ATO? Remember the HDT is a very specific structure that can be attacked by the ATO, probably with few political consequences. Compare this to, say, the ATO saying you now have to quarantine property losses owned personally.
I'm the type to prefer a tried and true model than the new-fangled thing that might work wonders......or blow up in your face.
Alex
Shadow, since there is no single structure that could provide asset protection and negative gear benefit, how would you combine structures to have the better of both world?
Purposefully misrepresenting my position? I would like HDTs, if they worked as promised. Case in point - the new position by the experts on redemption value. Julia and I have stated that the units must attract a capital component for the negative gearing to work, and we got bashed. And we turned out to be right. Here's a thought to ponder - people who are right don't change their position. I don't write these things to make money, I'm writing this to warn you. The tax position on HDTs is very unclear and you use them at your own risk.
I've seen some HDT deeds that some accountants have sent me from some groups that scare the living daylights out of me. When the ATO pulls out their sledgehammer ruling to deal with HDTs, there will be quite a few unhappy people.
An investment strategy does that, a HDT does not. Don't you know the difference?
My problem is that one day people were arguing you could redeem them at cost or cost plus something. The next day you have to pay CGT on a much higher value.
If there's no difference on CGT treatment, which we both agree on, why spend close to $10,000 in fees over seven years during that crucial initial investment phase when you don't need to? You could use that to pay down debt, do a reno and grow your rental yield, build a deposit, etc.
Hi DK,
I don't think it is possible based on the latest rulings. If asset protection is important then a Discretionary Trust would be better (or a HDT with the units having already been redeemed).
However for most people, insurance is far more important than asset protection. Obviously I can't speak for others, but the chance of me being sued is very low as I am just not in a profession where that is likely to happen.
The main benefits of the HDT are:
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility to
a) Keep the Units, and let the portfolio become cash flow positive, streaming all income to the Unit holder. The structure now operates the same as if the properties had originally been purchased in the user's personal name.
b) Redeem the Units at Market Value and pay the relevant Capital Gains Tax. The structure now operates in the same way as a normal Discretionary Trust and income can be streamed as appropriate.
c) Keep the units, buy more property and continue to run a negatively geared portfolio, living off the equity. This way you get the best of both worlds... you keep the negative gearing benefit and there is no CGT event, so it does not matter that the Units are worth 'market value'. (Of course, if ever questioned by the ATO, your aim should be to eventually make a profit).
Cheers,
Shadow.
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Hello Mry. No. Your position is very clear. You don't like HDTs.
Exactly. You don't like them because you don't think they work as promised. Who exactly made these promises to you? Let me make a 'promise'. The HDT provides the following benefits...
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility
Would you like to argue against any of those benefits? You like to pick at one other perceived benefit, state that this one doesn't really work, and then use this to suggest that all HDTs are 'bad'.
This would be like if I bought a new car, and I told you it was inexpensive, efficient, environmentally friendly, fast, luxurious and looked great. Then you come along and say, "yeah, but it can't fly... that car is no good". Who cares if it can't fly. That's not why I bought it!
Exactly. The cost of running the HDT is irrelevant compared to the amount of money that an investment property portfolio and strategy can generate.
The difference between what and what? Please explain. Are you seriously asking me if I know the difference between a HDT and an investment strategy? I think if you read my posts it is quite clear that I have a strategy and I also have a HDT. No they are not one and the same. My strategy is not just 'get a HDT and hope for the best'. I was well aware of the asset protection limitations with HDTs. Asset protection is not an issue for me.
My strategy is based on Living on Equity. I use a HDT to hold my assets.
I want to Negative Gear today, and I plan to Live on Equity in the future. At the same time I want to be able to easily pass assets to my children, and I want the flexibility to easily change my strategy in the future if my circumstances change. The HDT is the perfect structure to achieve these benefits.
You don't have to pay CGT if you don't redeem the units. For those us who follow a 'Living On Equity' strategy, this is ideal.
Depends on the user. For someone who is happy to keep a very small property portfolio, perhaps just one investment unit, then $10K may be a big issue. But I think many people on this forum have aspirations to control a much larger portfolio. I would say $10K over seven years is an irrelevantly small sum of money for those people (and accountancy fees are tax-deductible anyway). Those are the sort of people for whom a HDT is very useful. Like I said before, a HDT is not for everybody, but for people who have the following characteristics, the HDT is perfect...
- Low-risk profession
- Reasonably good income (want to Negative Gear)
- Plan to grow a large investment portfolio (multi-million dollar)
- Want to easily pass properties down to children
- Require a very Flexible Structure
The main benefits of the HDT are:
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility to
a) Keep the Units, and let the portfolio become cash flow positive, streaming all income to the Unit holder. The structure now operates the same as if the properties had originally been purchased in the user's personal name.
b) Redeem the Units at Market Value and pay the relevant Capital Gains Tax. The structure now operates in the same way as a normal Discretionary Trust and income can be streamed as appropriate.
c) Keep the units, buy more property and continue to run a negatively geared portfolio, living off the equity. This way you get the best of both worlds... you keep the negative gearing benefit and there is no CGT event, so it does not matter that the Units are worth 'market value'.
Cheers,
Shadow.
To the rest of the forum members who are reading this thread and are getting confused by the details: I offer this. I will use something when either
1) I understand how it works, or
2) There is sufficient evidence that it works the way it's supposed to
So I'll fly in a plane even though I don't really understand how it works, because there is sufficient evidence that it will work the way it's supposed to. Likewise the internet, cars, trains, TVs, mp3 players, etc. I don't really understand how it works because there is overwhelming evidence that they will work the way it's supposed to (I generally don't buy technology until it's in the 2nd or third generation). Let them work out all the bugs first, and then I'll buy it.
I use the same philosophy for investments and investment structures. With an ordinary discretionary trust and owning in my own name, I both understand the basics behind how it works and believe there is sufficient evidence that it will do what it promises (owning in my own name: get all deductions, but limitations such as CGT and estate planning) and DTs (deductions quarantined but income streaming including for CGT and estate planning).
With a HDT, even though I'm an accountant, or BECAUSE I am an accountant, I had my doubts that it would allow both deductions AND all the usual benefits of a DT, as was discussed in previous months. So I have avoided the structure. I may be wrong (though subsequent events have confirmed my fears) but it doesn't matter for me. I will not use a structure that has not been tested with time and precedent, and where fundamental details are still in doubt. DTs and owning in your own name, even with the limitations, are at least KNOWN.
When I use a discretionary trust, or own in my own name, I know exactly what the rules and limitations are. If I use a HDT, I do not have the same level of knowledge because there are still unknowns. On that basis alone, I will not use a HDT.
Ask yourself: would you put money into an investment you don't fully understand, and it isn't a tried and tested investment (basic stuff like listed shares, property, etc)? If I said 'here is a new structured product, it does x and pays y and it'll do all this because my bank has lots of expensive lawyers and advisors who say it's ok', would you just invest on that basis? Tax strategies sold by the biggest accounting firms in the world get shot down by tax authorities. Firms like Deutsche Bank (one of the biggest investment banks) and KPMG (one of the Big 4) have recently had their tax shelters defeated in the courts.
All they can say is that they have legal opinions and are reasonably sure their structures would hold up in court. They didn't. I don't need a legal opinion for a DT because I KNOW it'll hold up in court if I use it the way people have been using it for decades and longer.
I'm an ordinary investor who prefers to invest in a known environment. That may mean I miss out on opportunities, but I never have to worry about how a tax ruling will mean I might have to amend my prior year tax returns.
Alex
1) I understand how it works, or
2) There is sufficient evidence that it works the way it's supposed to
So I'll fly in a plane even though I don't really understand how it works, because there is sufficient evidence that it will work the way it's supposed to. Likewise the internet, cars, trains, TVs, mp3 players, etc. I don't really understand how it works because there is overwhelming evidence that they will work the way it's supposed to (I generally don't buy technology until it's in the 2nd or third generation). Let them work out all the bugs first, and then I'll buy it.
I use the same philosophy for investments and investment structures. With an ordinary discretionary trust and owning in my own name, I both understand the basics behind how it works and believe there is sufficient evidence that it will do what it promises (owning in my own name: get all deductions, but limitations such as CGT and estate planning) and DTs (deductions quarantined but income streaming including for CGT and estate planning).
With a HDT, even though I'm an accountant, or BECAUSE I am an accountant, I had my doubts that it would allow both deductions AND all the usual benefits of a DT, as was discussed in previous months. So I have avoided the structure. I may be wrong (though subsequent events have confirmed my fears) but it doesn't matter for me. I will not use a structure that has not been tested with time and precedent, and where fundamental details are still in doubt. DTs and owning in your own name, even with the limitations, are at least KNOWN.
When I use a discretionary trust, or own in my own name, I know exactly what the rules and limitations are. If I use a HDT, I do not have the same level of knowledge because there are still unknowns. On that basis alone, I will not use a HDT.
Ask yourself: would you put money into an investment you don't fully understand, and it isn't a tried and tested investment (basic stuff like listed shares, property, etc)? If I said 'here is a new structured product, it does x and pays y and it'll do all this because my bank has lots of expensive lawyers and advisors who say it's ok', would you just invest on that basis? Tax strategies sold by the biggest accounting firms in the world get shot down by tax authorities. Firms like Deutsche Bank (one of the biggest investment banks) and KPMG (one of the Big 4) have recently had their tax shelters defeated in the courts.
All they can say is that they have legal opinions and are reasonably sure their structures would hold up in court. They didn't. I don't need a legal opinion for a DT because I KNOW it'll hold up in court if I use it the way people have been using it for decades and longer.
I'm an ordinary investor who prefers to invest in a known environment. That may mean I miss out on opportunities, but I never have to worry about how a tax ruling will mean I might have to amend my prior year tax returns.
Alex
Hi Alex, it doesn't provide ALL the benefits of a discretionary trust. The main benefit of a DT that was in doubt was the asset protection. That has now been clarified. However, the HDT does provide the following benefits. I don't believe there is even any debate about these benefits. They are quite clear and factual. None of these benefits are in any doubt whatsoever.
- Negative Gearing
- Estate Planning
- Anonymity of Assets using Corporate Trustee
- Land Tax Threshold (except NSW/VIC)
- Does not vest after 80 years (Chan&Naylor HDT only)
- Flexibility
Do you really need asset protection... are you at high-risk of being sued?
For people in low-risk professions, don't you think the benefits above would be useful.
Cheers,
Shadow.
You do what you want, and I do what I want. It's not a matter of whether I need asset protection or not: I just dislike the fact that the functions of a HDT is changing with time. It's like saying here is a car that has all these specs and functions including, say, blue headlights, and when I buy it I realise that it hasn't got blue headlights. Do I really need blue headlights? Probably not, but that's not the point. It's the fact that I was under the impression (whether specifically told or otherwise) that it will have blue headlights, and I would be rather miffed if it doesn't, regardless of whether I use them or not.
I prefer things where I know what I'm dealing with. If that means I lose out on opportunities, fine. I'm a conservative investor. That means I miss out on some opportunities but I don't take what I perceive to be undue risk (especially regulatory risk: which is the main reason I don't use a super fund to invest in, for example).
You guys can discuss the details to death. For me, I'm keeping it simple. Not having to worry about the implications of future HDT-related rulings means I can focus on what makes me the money: buying, compouding growth and rent.
Do I need asset protection? Not now, but I will if my plans develop the way I expect them to.
Alex
I prefer things where I know what I'm dealing with. If that means I lose out on opportunities, fine. I'm a conservative investor. That means I miss out on some opportunities but I don't take what I perceive to be undue risk (especially regulatory risk: which is the main reason I don't use a super fund to invest in, for example).
You guys can discuss the details to death. For me, I'm keeping it simple. Not having to worry about the implications of future HDT-related rulings means I can focus on what makes me the money: buying, compouding growth and rent.
Do I need asset protection? Not now, but I will if my plans develop the way I expect them to.
Alex
Hi Gang,
Perhaps some of us including myself at times focus too much on tax minimisation via negative gearing and the use of more complex structures and in doing so create all sorts of problems (not to mention stress) for ourselves.
Maybe focusing on buying quality assets at the right time in the cycle that pay for themselves from day one would see us better off. A look back at Keith J's interview is a real education in this area. This is my thinking nowadays. I might pay more tax but hope that this is well and truely more than compensated by better returns on investments through choosing the right income producing assets at the right time.
Cheers - Gordon
Perhaps some of us including myself at times focus too much on tax minimisation via negative gearing and the use of more complex structures and in doing so create all sorts of problems (not to mention stress) for ourselves.
Maybe focusing on buying quality assets at the right time in the cycle that pay for themselves from day one would see us better off. A look back at Keith J's interview is a real education in this area. This is my thinking nowadays. I might pay more tax but hope that this is well and truely more than compensated by better returns on investments through choosing the right income producing assets at the right time.
Cheers - Gordon
Hi Shadow,
Could you elaborate on this, what exactly do you mean by 'estate planning'?
Thanks.
