Hybrid Discretionary Trusts - The final word.

[Chris Batten]

Chris,

I have an MGS HDT established in 2005 with no amendments to date. I am back in Oz since Jan this year but prior to that I have been overseas. We accumulated alot of tax losses over the period we were overseas in relation to two properties we held (and still hold) in that HDT.

From your earlier post in this thread i got the impression that if i update the HDT then all of those losses will remain available to me. If I don't, then I could lose them, is that right?

Thanks.

Ralph

That is right. Check the www.macquariegs.com.au website. If you don't amend you will be denied your interest deduction. That is the position the ATO has taken because of certain circumstances. See the attachments to the first post.

Chris

 

[Chris Batten]

Just read this on the NTAA website recently

Redwing

Spot on. Reckon Limited, a public company, don't sell hybrid trusts. Go to their website. They did until a few years ago. But the fact remains they don't sell them today [Thursday 2 June 2011 10:37:25pm EST].

I didn't have lamb today. That is a fact. I am married to a beautiful greek girl whos family love lamb. But did I have it today (i.e. Thursday 2 June 2011) no. That is a fact.

Give me a break.

Chris

 

[Chris Batten]

Just read this on the NTAA website recently

Redwing

Regarding the NTAA claim that a search of the rulings register doesn't show my ruling. I agree it doesn't. I have spoken to the ATO and there is a problem with updates to the ruling register.

I will openly admit to being a fraud, a lair and a person of considerable bad character if the ruling I received turns out to be fake on 1 condition. The NTAA allows me to publish the letter I received from their lawyers about their superfund being outdated.

The NTAA and I both know who doesn't want that material made publicly available.

Don't we Brent Jones?

Chris

 

[Rob G.]

RobG

What do you mean by taxable income? Is that revenue income and stautory income? If so I agree with you.

I can't control the ATO view and should I add don't agree with the ATO view.

I accept your position, however is it academic? If the ATO don't agree we have the right to spend $200,000 and test the law. I assume you know a lot of times the ATO has lost in court. But yuo and I pay through our taxes for them to fight you to prove your right.

Chris

Hi Chris,

This might be just an academic point if nobody is prepared to litigate, however I am just postulating the reasoning that a court may take. It's priority is not to maintain the revenue but to apply the law.

There is ample trust and revenue law to show that a person who is 'effectively' assigned an interest in a trust from a beneficiary does actually derive the income from that trust interest. In fact it is enshrined in the CGT legislation that the 'beneficiary' can have a trust interest via assignment (e.g. CGT event E5 s.104-75(6)(a)).

If this assignment is from an income beneficiary, then no rights to capital exist. What is acquired is a right to income.

This used to be a common commercial transaction many years ago. Therefore if the 'purchaser' deals at arms length then interest on a loan to fund that assignment should be deductible.

It should not be a big step in reasoning to extend this to an issue of income units directly.

Its your fault ... you brought the subject up and now I can't leave it until I have thought it through more thoroughly !!!

Cheers,

Rob

 

[Mry]

I'd really like to look at that ruling before making any conclusions. I'll wait for it to appear on the register.

 

[redwing]

Hi Chris,

I have a MGS HDT and will be getting it reviewed, it would seem prudent to do so with regards to the above and the ever changing rules of the taxation game

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change – Charles Darwin

It's to hard to keep up with the rules if your not involved in the game, what with Taxpayer Alerts, ATO I.D's, PBR's, Practice Statements, Superannuation changes, GST, FBT, Rulings, Withdrawn I.D's etc etc

Its been an interesting thread with some insightful posts from members, sadly its above my comprehension when you get into the nuts 'n' bolts

 

[Chris Batten]

This might be just an academic point if nobody is prepared to litigate, however I am just postulating the reasoning that a court may take. It's priority is not to maintain the revenue but to apply the law.

There is ample trust and revenue law to show that a person who is 'effectively' assigned an interest in a trust from a beneficiary does actually derive the income from that trust interest. In fact it is enshrined in the CGT legislation that the 'beneficiary' can have a trust interest via assignment (e.g. CGT event E5 s.104-75(6)(a)).

If this assignment is from an income beneficiary, then no rights to capital exist. What is acquired is a right to income.

This used to be a common commercial transaction many years ago. Therefore if the 'purchaser' deals at arms length then interest on a loan to fund that assignment should be deductible.
It should not be a big step in reasoning to extend this to an issue of income units directly.

Its your fault ... you brought the subject up and now I can't leave it until I have thought it through more thoroughly !!!

RobG

I totally agree and actually would suggest what you have described above would receive a full deduction for the interest. The point is the purchaser dealing at arms-length. For example what are you going to pay for units in my hybrid discretionary trust under the following circumstances:

- You don't have a right to capital,
- Trustee can charge fees,
- Redemption is at Trustees discretion,
- Trustee can issue units and water down your entitlements,
- Trustee can make interest free loans to other beneficiaries,
- etc, etc.

People want the flexibility with a family trust, even if it is hybrid, and the drafting to make it arms-length removes a lot of the flexibility. I assume you would want:

- A right to capital (At least amount paid for units),
- Trustee fee charging to be restricted,
- Absolute right to redeem,
- No ability to water down your entitlements,
- No ability to make interest free loans, etc

I think what you are saying can be done, however I don't think the purchase price for the units would be equal to the purchase price of the property. If the trust was going to fund a property acquisition with the issue of equity then the price payable for units that give rise to ordinary income and capital gains and a redemption amount that relates to the market value of the assets of the trust would be different to the price payable for units that give rise to ordinary income only.

It is a matter of valuation at the time of issue of the units as well as at the time of transfer or redemption.

Chris

 

[Chris Batten]

I'd really like to look at that ruling before making any conclusions. I'll wait for it to appear on the register.

Mry

The edited version of my ruling will be included as an attachment to my show on my television network from Wednesday. So too will the Treasury document that says ALL SMSF borrowings have a CGT problem. Treasury have pulled this document from the web to cover something up.

To speed up your searches as you wait for the Private Binding Rulings register I provide to you the Authorisation Number.

Authorisation Number: 1011723097188

Chris

 

[Chris Batten]

I have a MGS HDT and will be getting it reviewed, it would seem prudent to do so with regards to the above and the ever changing rules of the taxation game

Redwing

What amazes me is why didn't any of the other providers of HDT's approach the ATO and work with them to get an understanding of what the ATO will and won't accept and what if any option could be achieved for clients that don't wish to go through a 2 to 3 year court battle.

I don't think just because you stopped selling them 3 years ago [NTAA] you don't still have a responsibility to clients who set one up through you. I don't agree with the ATO view, however, I didn't want to just say if you get an assessment for $40,000 following denial of your interest "we can fight this for 2 years and $150,000 in legal fees and win".

Chris

 

[Rob G.]

RobG

I think what you are saying can be done, however I don't think the purchase price for the units would be equal to the purchase price of the property. If the trust was going to fund a property acquisition with the issue of equity then the price payable for units that give rise to ordinary income and capital gains and a redemption amount that relates to the market value of the assets of the trust would be different to the price payable for units that give rise to ordinary income only.

It is a matter of valuation at the time of issue of the units as well as at the time of transfer or redemption.

Chris

Absolutely true Chris.

I never considered the HDT as an optimum structure for property acquisition, although it might niche into some special requirements.

However, your previous post about refinancing via borrowing full market value has added a variable that I did not previously consider.

Cheers,

Rob

However, you previously raised the possibility of refinanced by b

 

[Chris Batten]

I never considered the HDT as an optimum structure for property acquisition, although it might niche into some special requirements.

However, your previous post about refinancing via borrowing full market value has added a variable that I did not previously consider.

Rob G

I think the optimum structure has to take into consideration land tax, stamp duty, super and income tax. I still think there is a place for the hybrid discretionary trust, however the land tax issue will mean a unit trust is much better for the first and maybe second property.

The refinancing applies to the market value as long as all the funds from the original issue have been used for income producing reasons and no revaluations or other tricks spoken about in the ruling haven't been adopted. It is the same as an individual selling their rental property to a discretionary trust and the trustee borrowing to acquire the property. The interest on the loan taken out by the trustee is fully deductible.

On the units with entitlements to ordinary income only I am going to have a talk to a few valuers and try to determine if there is a formulae I could create for both entry and exit and run it past the AC. Will let you know how I go as it would be good to have a deed with that class of unit. Maybe for renovations and when you have a large deposit.

Chris

 

[AdamN]

Hi Chris,

To speed up your searches as you wait for the Private Binding Rulings register I provide to you the Authorisation Number.

Authorisation Number: 1011723097188

I just punched that Authorization number above into the ATO Register of Private Binding Rulings but got a "document not available" response, I'm guessing as it is still awaiting publication.

I've read this thread a couple of times however I have the following questions:

1) You said above in post #61:

If you don't amend you will be denied your interest deduction. That is the position the ATO has taken because of certain circumstances

Are you able to briefly explain in laymans terms what the "certain circumstances" were that resulted in the ATO's current position?

2) I’m holding my MGS HDT deed in my hands at the moment, can you advise the actual clause(es) that need to be amended as a result of this ATO ruling? Can you then advise how the clause(es) should read in order to fall in line with the ATO ruling? No, I don’t plan to amend them myself I’m just keen to clearly understand the problem and the solution relating to the product itself.

3) The Private Ruling extract says "This ruling applies for the following period: Financial Years ended 30 June 2011 to 30 June 2015". Maybe this is a crystal ball question that you can't answer yet, but what happens after that 5 year period?

Thanks.

 

[Jimmyjamjars]

Meant to post this here but posted in another thread by mistake

Some here are talking about MSG's deeds from a few years ago needing amended. I have one from 2004, am I up for changes so radical from the original that it will render my existing deed as unrecognizable or only a few amendments ? I only have one property in the trust with my wife and I as trustees and we own half the special income units each, with all rental income distributed to her and I half/half. We claim an interest deduction on the money borrowed to purchase the units. I can't see how anything would change too much, anyone care to speculate ?

 

[Chris Batten]

I've read this thread a couple of times however I have the following questions:

1) You said above in post #61:

Are you able to briefly explain in laymans terms what the "certain circumstances" were that resulted in the ATO's current position?

2) I’m holding my MGS HDT deed in my hands at the moment, can you advise the actual clause(es) that need to be amended as a result of this ATO ruling? Can you then advise how the clause(es) should read in order to fall in line with the ATO ruling? No, I don’t plan to amend them myself I’m just keen to clearly understand the problem and the solution relating to the product itself.

3) The Private Ruling extract says "This ruling applies for the following period: Financial Years ended 30 June 2011 to 30 June 2015". Maybe this is a crystal ball question that you can't answer yet, but what happens after that 5 year period?

AdamN

1. I had been providing hybrid discretionary trusts since 1995. The ATO had asked and been given the deed in 1998, 2001 and 2003. There appeared no problems. A few promoters started shifting the entitlement to ordinary income away from the unitholder and the ATO snapped. They then released the Taxpayer Alert 2008/3 in 2008 and then Taxation Determination TD2009/17. Both of these state where income can go to other beneficiaries then the interest isn't deductible in full.

2. There is no problem with the product. When the ATO started making noises in 2007 I briefed a Barrister from Selbourne Chambers in relation to the MGS HDT. His opinion was the interest is deductible in full and a lot of his arguements were indentical to those from the Federal Court judges in Forrest. Those that amend get the opinion. The reason to amend is to avoid a fight with the ATO. BTW those that don't amend and decide to fight will also get the opinion. I think the MGS HDT is sufficient and so to does the barrister and I believe so to would a judge. Many people don't want to go through with the fight to prove it. I have published enough material of what the amendments are for and what they do. Check the MGS website.

3. The ATO practice is to only provide for a 3 to 5 year window for a Private Binding Ruling. The issue is the law may change and there still exists uncertainty as to whether the ATO is still bound if the law changes.

Chris

 

[Chris Batten]

Some here are talking about MSG's deeds from a few years ago needing amended. I have one from 2004, am I up for changes so radical from the original that it will render my existing deed as unrecognizable or only a few amendments ? I only have one property in the trust with my wife and I as trustees and we own half the special income units each, with all rental income distributed to her and I half/half. We claim an interest deduction on the money borrowed to purchase the units. I can't see how anything would change too much, anyone care to speculate ?

JimmyJamJars

All MGS Deeds prior to July 2010 require amending to avoid the ATO amending assessments. How you are operating the trust is exactly how you should operate the trust. The amendments will have no effect on the way you are operating the trust. The ATO want the trust tightened so there is less chance of you getting up to mischief.

Chris

 

[Jimmyjamjars]

All MGS Deeds prior to July 2010 require amending to avoid the ATO amending assessments. How you are operating the trust is exactly how you should operate the trust. The amendments will have no effect on the way you are operating the trust. The ATO want the trust tightened so there is less chance of you getting up to mischief.

Chris

Thanks Chris,
I will be in touch with you this week, I got Nick to set up my trust yet received the letter from YOU, don't know why this was the case ? Is it imperative that I get the deed amended BEFORE June 30 or as long as it is before I put my tax return in ?

JIM

 

[Chris Batten]

Forget hybrid amendments think TLAB No.5 Immediately

Something has overtaken the hybrid amendments that I think you should be aware. Tax Laws Amendments (2011 Measures No.5) Bill 2011 has been introduced and you better assess your position immediately as time might be running out.

In brief.

Following the decision in Bamford that simply reinforced the proportionate theory in relation to the distribution of trust income the Government announced it would change the laws to allow streaming of capital gains and franked dividends to certain beneficiaries.

The Bill was introduced on 6 June 2011 and applies to the year ended 30 June 2011 and subsequent years. If you make a capital gain or franked dividends in the 2011 year (both discount and non-discount) capital gains then if your trust deed permits and you get the resolutions right you stream capital gains and franked dividends outside the proportionate approach.

Have a look at paragraph 2.169 on page 62 of the Explanatory Memorandum and you will see the importance of the trust deeds definition of trust income. I am amending deeds for the hybrid issue, Bamford and TLAB No.5. I am also doing up draft resolutions, distribution statements and other documents. You have to read 2.62, 2.63 and 2.64 of the EM. I have reproduced same in the attachment.

This is beyond madness. Read the following link to the ATO website where they say under Trustee resolutions "Therefore in framing a resolution, a trustee may like to consider its tax effect should the law not be enacted or not be enacted as proposed." What the? I have 2 barristers working this weekend as well as myself trying to frame resolutions that cover the field.

This is a ridiculous amount of pressure and uncertainty to place on professionals and trustees with only 19 days to go before the end of the financial year.

If your deed is Bamford compliant and your trust made no capital gain and/or franked dividend then don't worry. The rest of you should Panic. If you don't believe me read the Explanatory Memorandum.

If I get a chance to prepare a paper I will post same here. What about clause 2.66 of the Explanatory Memorandum? You can record capital gains 2 months after the end of the year. I have seen this before from the ATO but not Treasury. I have attached the specific part.

Chris

 

[Chris Batten]

I will be in touch with you this week, I got Nick to set up my trust yet received the letter from YOU, don't know why this was the case ? Is it imperative that I get the deed amended BEFORE June 30 or as long as it is before I put my tax return in ?

Jim

The amendment covers Bamford, TLAB No.5 and the hybrid issue. You also get the draft resolutions, distribution statements and lots of other material. Following my initial reading of TALB No.5 I might also prepare for the accountants, including Nick, the journal entries and how the accounts should be prepared. Stay in touch with Nick as he knows what is going on. Some accountants are oblivious to the whole thing. God help them if they have a client with a capital gain or franked dividend. You can easily stuff it up and have it taxed to the Trustee.

Chris

 

[JIT]

Thanks for the update Chris.

Following the decision in Bamford that simply reinforced the proportionate theory in relation to the distribution of trust income the Government announced it would change the laws to allow streaming of capital gains and franked dividends to certain beneficiaries.

Are you able to explain for the laymen here what the "proportionate approach'' means and how this is different to ''allowing streaming of capital gains and franked dividends to certain beneficiaries"?

Have a look at paragraph 2.169 on page 62 of the Explanatory Memorandum and you will see the importance of the trust deeds definition of trust income.
Chris

Chris, what definition of trust income does MGS use, is it one of those listed in the examples in 2.169, or some other combination of these?

Also, is this TLAB good or bad for MGS HDT's (or neither)?

 

[Chris Batten]

From Bamford to TLAB No.5

JIT

I have attached to this post a document titled "The Bamford Decision & the New Streaming Laws." It is not a masterpiece. It is 4 pages I tried to put together to assist people in understanding what happened in Bamford and why these amendments are taking place.

Many people ask me if the MGS Deed is Bamford compliant. Have a look at the table on page 2 and compare the crucially needed clause in the Bamford Trust to the one in the MGS Deeds. I think if the Bamford Trust gets the High Court approval for the ability due to clause 7(n) to include capital gains as "income of the trust estate" then I'm happy the MGS Deed will get there.

Regarding the MGS HDT, like all HDTs, the ATO wants the ability to stream capital gains to other beneficiaries removed from Hybrids. That is the whole point of the ATOs arguement. This means the TLAB No.5 amendments make no difference to a hybrid trust that wishes to conform to the ATO view. I note another provider is encouraging their clients to amend their hybrids as a result of Bamford to give them more tax effectiveness. I don't understand this at all.

If the attached doesn't answer your questions of what to do before 30 June let me know as I am preparing a "Accountants and Trustees Guide - Do I have to worry or do anything before 30 June 2011?".


Chris