Hybrid Discretionary Trusts - The final word.
- Thread starter Chris Batten
- Start date
Hi Chris,
Again, I haven't read your deed.
However, the ATO letter suggests there is nothing to stop the trustee from dissipating the unit holder's corpus and hence reducing the market value of that interest.
Maybe that is why they are reluctant to apply the market value substitution.
I get the impression that the ATO is clinging to the Fletcher case about an interest being defeasible for less than value.
However, it certainly does not stand for the principle that the investor must have interest in all of the income and all of the capital of an investment product.
If I could borrow at a low enough rate, I could purchase various components of stripped bonds which by definition do not satisfy the ATO criterion.
Yet as yields vary I cannot guarantee a greater return than my borrowings, but providing it is still an arm's length investment with some reasonable prospect of providing positive returns then I should be able to deduct the entire interest under s.8-1 ITAA97 (subject to specific TOFA legislation).
Cheers,
Rob
Rob G
When you say dissipating I think you mean disposing for consideration less than market value. The ATO cannot introduce new terms to achieve objectives. You either dispose or you don't dispose. What's dissipate? Is this word defined in the Act?
By "dissipate" I meant to dispose, apportion or appropriate trust property to others so as to reduce any proprietary interest of the unit holder.
Any ability of the trustee to reduce the unit holders interest (as defined under the deed) by disposing or apportioning to others for less than value would ordinarily make the beneficiary's interest "defeasible".
Maybe the ATO is still trying to impute to the beneficiary the entire interest in the trust property, rather than looking at the terms of the deed to see what is arm's length.
Cheers,
Rob
Chris,
This paragraph reads:
"Further, there is no requirement for the trustee to preserve the trust's capital for the purpose of redemption. There is nothing to prevent the trustee reducing the value of the net assets of the trust prior to redemption, for example, by gifting or distributing trust capital to a discretionary benficiary."
Just to clarify, are you saying here that if the ''market value substitution rule'' applies, then the above cannot happen?
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Chris,
Just on this point, I recall when I purchased my MGS HDT in 2005 that the sellers of my deed told me at the time that SIU's could be redeemed at cost, thus making the HDT seem quite attractive after the redemption event.
Later on I think it was changed to cost + CPI, NPV or something similar, and after this people started talking more about market value of the property.
Were you aware of the ''market value substitution rule'' way back then?
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MV Substitution
Chris
I recall an older (1yr ago) paper on the MGS website (www.macquariegs.com.au) which addressed this precise issue. I couldnt find it. As I recall you asked for a Ruling (now obtained) and the ATO argued that a unit holder "might" redeem for something other than market value - ie Cost. I may be corrected but you then threw this back at them? My understanding of the Forrest decision may be a bit nieve but as I recall the HIgh Court took a similar view that the trustee might be permitted to remdeem SIU at some value other than market but the Court took the view that trust law obligations + tax law meant that they just cant.
Isnt this like suggesting that a property owner "could" decide to sell their share of a property for something less than maket value? Why would someone do this unless Part IVA could apply? Who chooses to sell for less unless there is a tax benefit? That is precisely what the MVS rule is about...When two parties are dealing at other other than on arms length terms then there needs to be a rule which substitutes the price agreed with market value. A bit similar to the "lower of cost or realisable value" rule that accountants seem to dig up in audits.
Most deeds use the expression "at the discretion of the trustee"... Is this something that might affect a trust deed if it confers the ability for the trustee to avoid MVS rules? In the ATO ruling it mentions trustee discretion as a concern. I also I thought I saw an issue raised by MGS /you about deeds with this style of term ? Is this suggesting that if I amend the ATO might still attack the deed or is it suggesting that I should avoid any deed that gives broad discretion??
Chris
I recall an older (1yr ago) paper on the MGS website (www.macquariegs.com.au) which addressed this precise issue. I couldnt find it. As I recall you asked for a Ruling (now obtained) and the ATO argued that a unit holder "might" redeem for something other than market value - ie Cost. I may be corrected but you then threw this back at them? My understanding of the Forrest decision may be a bit nieve but as I recall the HIgh Court took a similar view that the trustee might be permitted to remdeem SIU at some value other than market but the Court took the view that trust law obligations + tax law meant that they just cant.
Isnt this like suggesting that a property owner "could" decide to sell their share of a property for something less than maket value? Why would someone do this unless Part IVA could apply? Who chooses to sell for less unless there is a tax benefit? That is precisely what the MVS rule is about...When two parties are dealing at other other than on arms length terms then there needs to be a rule which substitutes the price agreed with market value. A bit similar to the "lower of cost or realisable value" rule that accountants seem to dig up in audits.
Most deeds use the expression "at the discretion of the trustee"... Is this something that might affect a trust deed if it confers the ability for the trustee to avoid MVS rules? In the ATO ruling it mentions trustee discretion as a concern. I also I thought I saw an issue raised by MGS /you about deeds with this style of term ? Is this suggesting that if I amend the ATO might still attack the deed or is it suggesting that I should avoid any deed that gives broad discretion??
MV Substitution
Chris
JIT raised a valid issue. If a deed provider suggested units could be redeemed at something other than market value - MIght that deed needs amendment to comply?? Or should I do nothing?
What should trusts do that have:
1. Units that "may" be redeemed at a value other than present maket value?
2. Give trustee discretion regarding value of units
3. Give a trustee discretion to refuse a redmeption
4. Allow a trustee to issue new units at some value less than present maket value
5. Units that have a different right to capital v's income
6. Units that may be refused value and entitlemnet through clauses which allow a trustee to disregard fixed rights to both income and/or capital
Or are the ATO likely to tolerate the trustee as long as it complies and disregards the written rules of the deed to use market value substituion??
Chris
JIT raised a valid issue. If a deed provider suggested units could be redeemed at something other than market value - MIght that deed needs amendment to comply?? Or should I do nothing?
What should trusts do that have:
1. Units that "may" be redeemed at a value other than present maket value?
2. Give trustee discretion regarding value of units
3. Give a trustee discretion to refuse a redmeption
4. Allow a trustee to issue new units at some value less than present maket value
5. Units that have a different right to capital v's income
6. Units that may be refused value and entitlemnet through clauses which allow a trustee to disregard fixed rights to both income and/or capital
Or are the ATO likely to tolerate the trustee as long as it complies and disregards the written rules of the deed to use market value substituion??
PaulGTaxAdviser
You have the same lack of creativity as I do regarding your name. Why couldn't you or I come up with JimmyJamJar. You have to love his signature "Bite off more than you can chew and chew like hell".
The document you are talking about is still there. It is the May 2010 "ATO's draft Notice of Objection Decision". It was what they sent me in preparation of amending peoples returns and then denying the objection. I seriously hope people don't think this has gone away. I think I have delayed the ATO action but I definately haven't stopped it.
Chris
PaulGTaxAdvisor
No man can reasonably predict what the ATO is going to do. The ATO wants Special Income Unitholders to have a right to income and capital gains associated with the asset. I think something less would satisfy a court but the question is how much less and why. Why if I am able to use the assets of the trust for my borrowing as a unit holder can't the trustee and other beneficiaries demand compensation. If I default on my loan and the arrears build up they could lose their entitlement to the asset.
So PaulGTaxAdvisor borrows to acquire units in my hybrid giving entitlement to 50% of the income. He asks can I secure my loan over the trust assets and potentially put them all at risk. I might say you can have your share of ordinary income but your entitlement to trust capital on redemption is what you paid plus CPI. If the assets grow by more than that then the other beneficiaries should benefit due to the risk you imposed on their assets.
The ATO will never decide the point in a fair way. They will decide it with their boss, Treasury, saying you guys need to collect more money.
Chris
woohoo [I told you PaulGTaxAdvisor we should have come up with other names]
I don't believe the MGS Deed needs updating. The ATO disagrees. If you want to fight them then don't update. If you don't want to fight them update.
Your option. Read this thread from start to finish to understand what it is all about or simply read the attachments to the first post.
Chris
The Hybrid Trust Ruling
The ATO contacted me last week to ask why I had requested a copy of my Private Binding Ruling be sent to a PO Box near a certain competitors premises. I advised I hadn't done so and they informed me they had a letter signed by me requesting my private information including the ruling.
I have a copy of the letter and would post it here only for an ATO/AFP investigation in relation to fraud, identity theft and various other offences committed under the Taxation Administration Act.
The best part. The fraudulent letter landing the person in some serious trouble, and I mean serious, was sent after I posted the ruling on Somersoft.
I think there is a lesson here for this person.
Chris
The ATO contacted me last week to ask why I had requested a copy of my Private Binding Ruling be sent to a PO Box near a certain competitors premises. I advised I hadn't done so and they informed me they had a letter signed by me requesting my private information including the ruling.
I have a copy of the letter and would post it here only for an ATO/AFP investigation in relation to fraud, identity theft and various other offences committed under the Taxation Administration Act.
The best part. The fraudulent letter landing the person in some serious trouble, and I mean serious, was sent after I posted the ruling on Somersoft.
I think there is a lesson here for this person.
Chris
woohoo
I don't know. It was a very big risk asking the ATO to issue the document to an address not on file. That's why they rang me. You will eventually find out what it is all about. I know who owns the PO Box and what firm they work for.
Chris
And here I was, thinking an Accountants life must be boring
Ha, ha - like this comment
Makes the KGB look tame
Chris
Hopefully the individual will memorise this quote from Sir Walter scott "oh what a tangled web we weave, when first we practise to deceive"
Hopefully the individual will memorise this quote from Sir Walter scott "oh what a tangled web we weave, when first we practise to deceive"
Coastymike
You of all people should know what sort of a fool lodges a document with the ATO pretending to be Chris Batten. For years I was a part of RATS and I think once you go on RATS you never leave it.
Chris
Yes very similar to writing a letter saying "hi its gina rinehart here just wondering if I can get a copy of my tax return. Rose seems to have stolen the damn thing"
