Hybrid Discretionary Trusts - The final word.

[JIT]

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.

Thanks Chris.

I've read your attached document and checked my trust deed.

I've got a 2005 MGS trust deed which has the exact same Clause #9 in it, and I haven't had any capital gains or franked dividends so I think I'm ok here, and will wait till your full amendment package comes through...

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

For completeness though, if you can post this up too that would be great, as I'm sure many of us here might have changed accountants since getting their HDTs initially setup, and their new accountants might be oblivious to all of this...

More so for those of us who have had a capital gain or franked dividend too...

 

[austini]

Chris,

Thank you very much for taking the time to provide valuable information relating the this topic to us here at Somersoft.

I would be grateful if you could tell me whether my following understanding of distributions post Bamford and given the latest update from the ATO is correct bearing in mind that I'm a layperson with only a basic knowledge of trusts..

I looked into the Bamford case outcome quite some time ago. From what I understood if your trust deed's definition of Net Income is that as defined in Section 95(1) of the Act AND one used the "proportionate" approach when distributing to beneficiaries then has anything really changed with the ATO's latest update that would require one to panic? That is, given the above definition of Net Income, even if there is capital gains and franking credits involved in determining Net Income and provided there is no "streaming" of different categories of income to specific beneficiaries (ie one continues to use the proportinate approach) then is there any need to update one's trust deed?

I hope the above makes sense.

Thanks - Gordon

 

[Chris Batten]

I looked into the Bamford case outcome quite some time ago. From what I understood if your trust deed's definition of Net Income is that as defined in Section 95(1) of the Act AND one used the "proportionate" approach when distributing to beneficiaries then has anything really changed with the ATO's latest update that would require one to panic? That is, given the above definition of Net Income, even if there is capital gains and franking credits involved in determining Net Income and provided there is no "streaming" of different categories of income to specific beneficiaries (ie one continues to use the proportinate approach) then is there any need to update one's trust deed?

Gordon

I prepared the attached paper. You are right. If you can accept the proportionate approach you are fine. You might also be fine if you don't. The hybrid discretionary trusts fall outside these discussions.

I don't think many need to amend for Bamford. No MGS client has to amend for Bamford. However, I think those that don't have an MGS deed need to check if the trustee can treat income and capital at his or her absolute discretion. I don't think you can ignore the Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No.5) Bill 2011 when it says at paragraph 2.35

"2.35 These amendments ensure that where a trustee has a power to stream under the terms of the trust, the streaming will be effective for tax purposes. These amendments do not in any way give trustees a power to stream where they do not already have the power to do so."

I hope the attached answers your questions.

Chris

 

[Chris Batten]

I've got a 2005 MGS trust deed which has the exact same Clause #9 in it, and I haven't had any capital gains or franked dividends so I think I'm ok here, and will wait till your full amendment package comes through...

JIT. What can I say. Sometimes you back a winner.

For completeness though, if you can post this up too that would be great, as I'm sure many of us here might have changed accountants since getting their HDTs initially setup, and their new accountants might be oblivious to all of this...

More so for those of us who have had a capital gain or franked dividend too...

Paper posted. It was suppose to be for my accountants only. Take your point. What if people have changed accountants.

Chris

 

[Terryw]

Chris,

May I pick your brain again, going slightly off topic?

Do you now of any way to add property to a testamentary trust and be able to get the minor’s tax concession from its income under s 102AG?

 

[Chris Batten]

Do you now of any way to add property to a testamentary trust and be able to get the minor’s tax concession from its income under s 102AG?

Terry

The only way I know is the provisions under section 102AG (2) (d) (ii). Property settled on the trustee within 3 years of the persons death. We are currently preparing a testamentary will at MGS that factors in land tax, stamp duty and self manged super. Properties can be left to multiple unit trusts and then the units transfered to a self managed superfund. Seeking ATO guidance before going ahead.

They just changed the law as to capital gains of a beneficiary of a testamentary trust in the 2011 Budget. Call me and I will explain. To much it go over here. Happy to talk as we are in the middle of development of some new products to take benefit of the new provisions. Like to bounce it off you.

Chris

 

[Chris Batten]

Finally the ATO Ruling

Terry, JIT, RobG, Austini, Mry, Redwing, JimmyJamJars, Francesco, Ralph and others

Enough is enough. I don't know what is wrong with the ATO register of Private Binding Rulings. To be honest I don't care. It took me 10 months to get it and they can't put it up?

I have got a lot out of this thread in terms of what people think and don't think and what people care about. Sitting in an office on Macquarie Street talking tax law everyday removes you from the people that are dealing with the coal face and I don't mean scientologists making large conributions to offshore super schemes (i.e. the Bamfords).

Thank you for you questions and feedback. I mean it.

I have attached the Edited Version of my Private Binding Ruling.

Thank you

Chris

 

[redwing]

Thanks for the contributions and updates Chris

 

[austini]

Chris, also a huge thanks from me.

Cheers - Gordon

 

[Rob G.]

Thanks Chris,

Still a query as to the definition of 'special income'.

The edited ruling states:

"... will be the amount that is attributable to the investment by the trustee of the moneys received by it from the issue of Special Income Units. "

That still seems a bit vague.

"Amount" has a wide common meaning. Does this include tax sheltered amounts ?

"Attribution" is a taxation law term for treating a beneficiary as having earned assessable income of another entity, but does not necessarily extend to non-assessable amounts. It also has a wider common meaning. Again, does this include tax sheltered amounts ?

The answer probably lies in other parts of your trust deed, however I don't have a copy to peruse.

Regards,

Rob

 

[Jimmyjamjars]

Thanks Chris for your updates and contributions.
Jim

 

[JIT]

Chris,

Thanks for putting up the PBR and the other attachments.

In the PBR it says:

"No additional special income units will be issued other than the special income units issued to you."

Does this mean that you can't issue more SIU's to yourself later on down the track (on top of the initial issue)? If so, how do you deal with this issue?

Or does this refer to issuing more SIU's later on down the track to unitholders other than yourself?

Also, in the PBR the property is aquired using 50% of SIU's and 50% of gifted funds.

What would you tell those with MGS HDTs and/or their accountants who ask about getting a PBR for their own particular circumstances? (even though their use of the HDT maybe no different to yours)

 

[Chris Batten]

Still a query as to the definition of 'special income'.

The edited ruling states:

"... will be the amount that is attributable to the investment by the trustee of the moneys received by it from the issue of Special Income Units. "

That still seems a bit vague.

"Amount" has a wide common meaning. Does this include tax sheltered amounts ?

"Attribution" is a taxation law term for treating a beneficiary as having earned assessable income of another entity, but does not necessarily extend to non-assessable amounts. It also has a wider common meaning. Again, does this include tax sheltered amounts ?

Rob

Special Income of the Trust is that amount of the net income that is attributable to the investment by the Trustee. When you say 'tax sheltered amounts' are you refering to deductible amounts? If so they are not included in the net income of the trust for tax purposes and therefore are not distributed to beneficiaries including the holders of Special Income Units.

Chris

 

[Chris Batten]

In the PBR it says:

"No additional special income units will be issued other than the special income units issued to you."

Does this mean that you can't issue more SIU's to yourself later on down the track (on top of the initial issue)? If so, how do you deal with this issue?

Or does this refer to issuing more SIU's later on down the track to unitholders other than yourself?

JIT

I did not put that in my application for ruling. I also didn't put "There will be no relationship between the trustee and the tenant or you and the tenant." The ATO after 9 to 10 months of delays wanted to finalise the ruling and realised a lot of people would be interested so where the ATO thought it appropriate they added facts that I didn't agree. At the end of the day I was after an indication of what amendments would be required so that clients would not have their interest deduction denied. The amendment doesn't restrict the trustee from Issuing more units or renting the property to a related party.

PS. Doesn't the trustee and the tenant have a relationship? It's called landlord and tenant.

Also, in the PBR the property is aquired using 50% of SIU's and 50% of gifted funds.

What would you tell those with MGS HDTs and/or their accountants who ask about getting a PBR for their own particular circumstances? (even though their use of the HDT maybe no different to yours)

For starters a PBR is only prospective. I would never tell anyone not to get a ruling from the ATO, however the applicant must be aware of the consequences of getting a negative ruling.

Chris

 

[Rob G.]

Thanks very much for your time Chris.

What I had taken as settled law or practice was probably more a reflection of ATO broad publications plus some commentators who were pushing a blanket opinion instead of looking at specific circumstances.

It will take some time to think about, however it would seem that the HDT may be able to carve a niche within family group wealth planning that I had not anticipated.

Thanks again,

Rob

 

[PaulGTaxAdviser]

Who to believing

Chris

It s been a while since we last spoke and great to see you have the Ruling after so much persistence. I dont get the SA issue with perpetuities raised in this thread.

Using a scheme to get your deed into a state (like SA) that doesnt stamp sounds like a great way to save as much as $500 compared to NSW. Sounds like a false economy to me. There is a QLD firm that sells companies and trusts and offers a "arrangement" that allows the deed to be settled by an agent of the formation firm in QLD. They brag about the stamp duty saving. The NSW OSR weren't impressed when they saw this - It seemed a blatant duty avoidance scheme. What is the worst that can happen if I'm involved as an accountant?

I reckon, forget the accounting firms that sell fancy named deeds (and SMSF deeds with paranormal abilities due to use of a "TM" name). Isnt the real truth, that if it sounds to good to be true - It probably is. I recall one big promoter - Lets call them B&M, claiming that hybrids can avoid land tax thresholds, and they told heaps of clients they didnt have "hdt" tax issues. Another large firm - I will call them Kleendocs had a unit trust that wasnt - As I recall it even had elements of a hybrid but they claim it meets the NSW OSR definition of a fixed trust. OSR said it wasnt. Who can I believe? And then we have seen a large number of outdated super fund deeds that have rules that contradict SIS.

Chris -Any thoughts on what OSR NSW opinion is on a deed being settled somewhere contrived? What implications could arise? Who might be liable? I say this cause I saw a case recently in NSW Supreme Court regarding an accounting firm (Bells) that had a poorly settled SMSF deed. It was in March - Sullivan's case I recall. What is your view on the implications for firms with dodgy hybrid/disc/smsf/unit trust deeds from dubious sources and then they get it all wrong? I'm thinking life is about to get hard for some advisers - What do you think? What are your tips for who to stay away from?

Paul

 

[Terryw]

Paul

Stamp Duty on trust deeds is governed by the Duties Act in NSW,

s58
http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/s58.html

States $500 duty is payable if the deed is executed in NSW.

I recall the OSR previously had on their website something concerning this and they were of the opinion that if any party to the signing of the deed was a resident, ordinarily, in NSW then NSW Stamp duty on the deed would apply. I can't find anything like this on the OSR site now.

Another section that may be of interest:
Chapter 11A covers tax avoidance schemes
284(1) For the purposes of this Chapter, a "tax avoidance scheme" is any scheme that a person, whether alone or with others, enters into, makes or carries out for the sole or dominant purpose of enabling liability for duty to be avoided or reduced.

 

[Chris Batten]

It s been a while since we last spoke and great to see you have the Ruling after so much persistence.

Paul

If this is the Paul I think it is PM me. Great to hear from you. Have a bit to catch up on. I think PM me is the correct expression. Send an email to my account here on Somersoft or alternatively email me. You know my personal email address.

Chris

 

[Chris Batten]

Stamp Duty

I have been involved in the past in the avoidance of stamp duty. Not, however the $500.00 on trust deeds. I am refering to large properties in New South Wales. It all came to a head in 2003 with the decision of Justice Ian Gzell in the Nemkal Investments Pty Limited v Chief Commissioner of State Revenue [2003] NSWSC 48.

In that case my clients sought to pay $2.00 stamp duty to transfer many properties into unit trusts of which the unitholders were SMSFs. If you read the case you will see at paragraph 7 the units were "Special Attributable Income Units". Yes it was a hybrid.

The OSR assessed for over $400,000 including penalties and interest and the Judge said "I propose to revoke the defendants assessment". (i.e. we won. Only $2 stamp duty payable).

I have been involved in stamp duty for many years before the 1997 Nemkal transaction. As Terry pointed out the Anti-avoidance provisions in Chapter 11 were framed on the ITAA Part IVA Anti Avoidance provisions. If you send your deed to another state in an attempt to avoid duty you are caught if it would otherwise have been executed in NSW.

For the purposes of section 284E "a tax avoidance scheme is any scheme that a person, whether alone or with others, enters into, makes or carries out for the sole or dominant purpose of enabling liability for duty to be avoided or reduced.' Sub-section 2 states "It does not matter that the scheme is entered into, made or carried out wholly or partly outside New South Wales."

Stamp duty avoidance is over whether it be millions of dollars of property or the $500 duty assessable on a declaration of trust under section 58 of the Duties Act 1997.

Chris

 

[JIT]

Hi Chris,

I just read a "newsflash" about HDTs, in it the author mentions about getting a "product ruling" for the use of the HDT... is this something you would consider?

Also, they comment about deed amendments potentially triggering a resettlement of the trust... do you have some certainty from the ATO that if done in a particular way this won't happen and result in a CGT bill for MGS HDT holders?