Hybrid Discretionary Trust in detail

Hi,

I have read up on how a HDT works in theory but I am trying to understand how it really works in practice. So I have created a scenario below to help me understand the issuing of Special Income Units, and what Capital is in a HDT.

A HDT was set up on July 2008, with a Corporate Trustee.
In May 2009, The Trustee signed the sales contract to purchase a residential property for 500k. A cheque of $50K for the 10% deposit was made from an offset account against my PPOR.
Settlement occurred on August 2009. On settlement, a cheque of $75K for the remaining 10% deposit + purchase costs was made from the same offset account.
My husband & I took out a Joint bank loan for 80% of the property price $400K.
Inclusive of purchase costs, the property costed $525K in total.
Immediately after settlement, $5K was spent to renovate property before renting it out.

1. The 20% deposit + purchase cost for each property is a loan from my husband & me to the Trust. Should we be issued with Special Income Units for this amount? Or is it contributed towards the CAPITAL of the Trust?
2. Is a legal agreement required to be drawn up between us & the Trust for the loan?
3. When should the Special Income Units be issued? At Settlement? Or as each amount is loaned to the trust?
4. How many Special Income Units should be issued?
5. How is the money spent on the renovation treated? As capital or Special Income Units? The money came from the offset account.
6. What is used to record the amount of money loaned to the Trust? A resolution?
7. At each financial year end, what accounting records need to be kept to indicate Trust income/expenses and Trust income distribution?

Thank you for your help.
P.M
 
Assuming your HDT complies and operates in accordance with the latest ATO rulings.

I am not an accountant, but will give it a shot as no one else has replied.

1. You would usually have received units for the full purchase price and costs. But this is flexible.

2. You are not really on lending money to the trust. You are borrowing to buy units in the trust.

3. Units need to be issued at settlement. it should all happen simualtaneously.

4. see 1.

5. You could treat it a few ways. 1 is lending money to the trust, 2. is buying more units.

6. Not sure, but there would be a resolution and a register of units issued.

7. All the usual tax records of the persons and the trust and resolution of profit/loss of the trust and distribution of income etc.
 
PM... don't waste your time/money setting up a HDT!

It was nothing more than a nice income generator for accountants, and sadly still probably is.
 
JIT

Is this conclusion based on the Full Federal Court decision handed down last week in Forrest's case ? Hybrids could well be back in full force. Oh how times change.
 
No I don't mean that case. Given that you were sure that HDT's were merely a revenue raising opportunity for practitioners I thought you must have been abreast of all recent developments.

Appreciate if you have a difference of opinion, Julie has, but to make a claim that this was only to generate revenue when you are not even abreast of the latest development is rather spurious.
 
No I don't mean that case. Given that you were sure that HDT's were merely a revenue raising opportunity for practitioners I thought you must have been abreast of all recent developments.

Appreciate if you have a difference of opinion, Julie has, but to make a claim that this was only to generate revenue when you are not even abreast of the latest development is rather spurious.

Apologies I wasn't aware of this case, maybe you could shed some light on it and its implications...

Is one to start recommending this structure more widely based on these ''new developments''?

My understanding is that at present it has very limited benefit (if any) to most mum/dad property investors.

The only benefit at present appears to be for accountants who get the higher fees for trust returns, and with clients unable to exit the structure due to do the costs/taxes involved.

So whilst it may not have been ''intended'' as a revenue generator in a ''negative'' way, it has ended up that way.

Just calling it as I see it.

I am happy to be corrected though...
 
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JIT

Over the past couple of years the principles re transferring to a superannuation fund at a later stage (with a unit trust at the top level), asset protection and the refinancing principle have been discussed ad infinitum. Not interested in discussing it all over again. Read the case Terry has put up and make your own conclusions.
 
I am sure Mr Forrest would have benefited much more by having this deed than his advisors would have. "he borrowed $4.5 million for the purpose of purchasing a number of units in the Minderoo Trust."
 
Agreed, in fact it is the "Hybrid" elements that I think are most contentious. My understanding is that deductibility of interest on units was never really in question and this is common to standard discretionary trusts. But that it is the apportionment of capital gains on disposal of assets to trustees, which the hybrid trusts allow that is the contentious element.

But I'm just a layman so may have this wrong. I know my accountant said that so long as we just use the standard discretionary trust rights then we should be OK and he was loathe to invoke the rights of the structure as a hybrid. Its a moot point to date as we have no capital gains to apportion between trustees.

Cheers,
Michael
 
Interestingly, the ATO does not apply s.51AAA to general investors who hope to make a capital gain in addition to their income from distributions.

Therefore, at least in the case where a unit holder cannot control a trust, who cares who gets the capital gains ?

If you purchase the income stream from a stripped bond, somebody else is getting the capital component, yet you could deduct your interest expense in full.

If the courts took that approach, I could see why the ATO would prefer the proportional approach to trust net income, since the unit holder would be taxed on the capital gain even if they don't receive it.

The issue of unit market value for redemption, and cost base could be really interesting in this situation.

Cheers,

Rob
 
Hi,

I have read up on how a HDT works in theory but I am trying to understand how it really works in practice. So I have created a scenario below to help me understand the issuing of Special Income Units, and what Capital is in a HDT.

A HDT was set up on July 2008, with a Corporate Trustee.
In May 2009, The Trustee signed the sales contract to purchase a residential property for 500k. A cheque of $50K for the 10% deposit was made from an offset account against my PPOR.
Settlement occurred on August 2009. On settlement, a cheque of $75K for the remaining 10% deposit + purchase costs was made from the same offset account.
My husband & I took out a Joint bank loan for 80% of the property price $400K.
Inclusive of purchase costs, the property costed $525K in total.
Immediately after settlement, $5K was spent to renovate property before renting it out.

1. The 20% deposit + purchase cost for each property is a loan from my husband & me to the Trust. Should we be issued with Special Income Units for this amount? Or is it contributed towards the CAPITAL of the Trust?
2. Is a legal agreement required to be drawn up between us & the Trust for the loan?
3. When should the Special Income Units be issued? At Settlement? Or as each amount is loaned to the trust?
4. How many Special Income Units should be issued?
5. How is the money spent on the renovation treated? As capital or Special Income Units? The money came from the offset account.
6. What is used to record the amount of money loaned to the Trust? A resolution?
7. At each financial year end, what accounting records need to be kept to indicate Trust income/expenses and Trust income distribution?

Thank you for your help.
P.M

Hi P.M.

I'm no accountant neither fin. adviser and my date-to-date job is not in any of those areas either.

Before purchasing any assets in the trust, you have to write the meeting minutes, Trustee resolutions, Units applications, issue Unit Certificates, etc. You give all those documents to your accountant and he/she uses them to prepare the Trust balance sheet and unit owenership structure.
You have to decide whether you were loaning $ to the trust or whether you were purchasing units in the trust. Purchasing units in the trust is what allows you to do -ve gearing. Base on the previous point, you would be either the loan applicant or the loan guarantor. Otherwise, the trustee will be in any of those roles. Another thing is that, If you were the guarantor of the funds, you won't be able to do -ve gearing if that was the case.

Hope this is of help.
 
Interestingly, the ATO does not apply s.51AAA to general investors who hope to make a capital gain in addition to their income from distributions.

When I've read S.51AAA in the past, my reading of it was that it refers to capital gains in the current year, ie an expense would not be deductible in the current year if the only assessable income in the current year is a capital gain.

It doesn't say anything about an expense not being deductible in the current year if future years' assessable income comprises capital gains.

Just my non-lawyer reading of S.51AAA.

Cheers
Jonathon
 
Interesting that Julia's newsletter published today recommends getting a private ruling straightaway, off the back of the Forrest case.

She hints that the ATO might just give in on the the deductibility on interest issue, which is perhaps the most pressing issue for many HDT holders.
 
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When I've read S.51AAA in the past, my reading of it was that it refers to capital gains in the current year, ie an expense would not be deductible in the current year if the only assessable income in the current year is a capital gain.

It doesn't say anything about an expense not being deductible in the current year if future years' assessable income comprises capital gains.

Just my non-lawyer reading of S.51AAA.

Cheers
Jonathon

Its just badly drafted.

Check out IT2589, which interprets the explanatory memorandum.

Cheers,

Rob
 
Interesting that Julia's newsletter published today recommends getting a private ruling straightaway, off the back of the Forrest case.

She hints that the ATO might just give in on the the deductibility on interest issue, which is perhaps the most pressing issue for many HDT holders.

The ATO could not introduce apportionment as new material in the court case.

I wonder why they did not use it in the tribunal ?

However, quite often, they will keep the issue simple to get a clear decision on a particular point.

Cheers,

Rob
 
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