Hybrid Discretionary Trusts - The final word.
- Thread starter Chris Batten
- Start date
Terryw
I think you forgot the 'Serious Idiots Offenders Act (As Amended) 1954 (Cth)'. I think the civil and criminal penalty regime should be amended to give judges a discretion to impose additional penalties to offenders who are just stupid.
On another note those that haven't prepared their 30 June 2011 resolutions please understand that they should be done by midnight tomorrow. You now have an ability to take capital gains outside the cluthes of section 95 calculations. This is imperative if you have capital gains and a revenue loss. Below is the conclusions of senior counsel to the question of a capital gains with revenue losses:
“Conclusion
Subject to the assumptions, caveats and detailed analysis above, the following conclusions appear, stated in highly abbreviated form:
• Capital characterisation for trust purposes and streaming of the capital gain to a target beneficiary without reduction for revenue losses results in the gain being taxed to that beneficiary as if his or her own.
• Inclusion of the gain in trust income reduces it by revenue losses, and streaming of the reduced gain to a target beneficiary results in the gain being taxed partly to that beneficiary and partly to the trustee.
• A similarly split result can be produced by capital characterisation for trust purposes coupled with streaming of that part of the gain which exceeds revenue losses.”
Senior Counsel, June 2011
I think those that are possibly affect by the above should do something tomorrow. I have attached a brochure regarding the new amendments. If they apply to you:
1. Make sure your deed defines income as Net Income or the trustee has that ability,
2. Make sure you can stream,
3. Frame your resolution accordingly.
Some parts of the new legislation is a nightmare and has unintended consequences. Be careful.
Chris
Yep, he needs to read Somersoft more often!
JIT
I think that might have saved him.
The Commissioner announced on 29/30 June 2011 that trustees have until 31 August 2011 to record an appointment of franked distributions. The Bill and resulting legislation gave trustees until 31 August to appoint capital gains, however now they have come out and said this applies to franked distributions.
I don't know what you should make of this. The Commissioners Press Releases are not binding. If you're scientologists who intend on borrowing funds to make large superannuation contributions to an offshore superfund then I think you should have made your appointment before 30 June (i.e. The Bamfords).
I don't trust him. But I received by email on Friday a set of minutes of meetings from an accountant. Why are accountants still doing minutes. Everyone knows the client wasn't in your office on 29 June 2011. Why pretend. Why not do a revolving or floating resolution.
Chris
I am always amazed at the number of accountants who prepare trust minutes as opposed to resolutions.
Redwing
A revolving resolution is one piece of paper whereby the trustee resolves to do something and the all directors sign the one piece of paper. The resolution takes effect when the last director signs.
A floating resolution is where you have two pieces of paper with the identical words (i.e. two exact copies of the same resolution). One director signs one and the other director signs the other. The resolution takes effect when the last director signs his piece of paper.
There are significant benefits of a floating resolutions especially when the directors are going to be in different locations when the resolution is to be made.
What's the difference between resolution and minutes?
I gather that resolution is standing instruction or policy of the trust while minutes merely record transactions at the meeting. Correct me someone if I am wrong.
Francesco
A resolution is a decision made by the trustee that doesn't require a meeting. A minute is a record of a decision made by a trustee at a meeting. They both achieve exactly the same thing, being a decision of the trustee.
Chris
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Is there a "Dummies Guide" to this?
Is there a "plain english" guide to all this HDT uncertainty and complexity? Or is "ask your advisor" the only valid response?
I realise this sounds like a dumb question, but I gotta ask it. I am a smart guy, but this field is not my strength. And it seems like you gotta know alot of stuff in great detail about HDT's to determine if they are right for you. Even when you do have an advisor involved.
The problem I have with the "ask your advisor" response is that it all depends on who your advisor is on how effective HDT's are viewed. Most of the advisors seem conflicted or confused.
For example, I am seeing these kinds of conflicting and confusing things written;
1) You will have trouble finding a bank that will lend to a HDT.
2) HDT's are not a useful asset protection vehicle any more. Best to choose a Unit Trust in some states or just go with a DT.
3) The people recommending and selling these HDT products are the same people now charging you a fee to update them. Shouldn't they be updating these things for free? Like a warranty period on their applicability to tax legislation.
I am not asking these questions to be inflammatory. I am asking because I genuinely want to know if I can use the damn things effectively.
Is there a "plain english" guide to all this HDT uncertainty and complexity? Or is "ask your advisor" the only valid response?
I realise this sounds like a dumb question, but I gotta ask it. I am a smart guy, but this field is not my strength. And it seems like you gotta know alot of stuff in great detail about HDT's to determine if they are right for you. Even when you do have an advisor involved.
The problem I have with the "ask your advisor" response is that it all depends on who your advisor is on how effective HDT's are viewed. Most of the advisors seem conflicted or confused.
For example, I am seeing these kinds of conflicting and confusing things written;
1) You will have trouble finding a bank that will lend to a HDT.
2) HDT's are not a useful asset protection vehicle any more. Best to choose a Unit Trust in some states or just go with a DT.
3) The people recommending and selling these HDT products are the same people now charging you a fee to update them. Shouldn't they be updating these things for free? Like a warranty period on their applicability to tax legislation.
I am not asking these questions to be inflammatory. I am asking because I genuinely want to know if I can use the damn things effectively.
Like I have said on other threads, HDTs are not viewed favourably by the ATO as investment vehicles because lots of people try to abuse them for negative gearing advantages.
As for asset protection, it can work but usually people want both tax AND asset protection together. Given the ATO's viewpoint on HDTs, it is hard to have both using a HDT. For concrete asset protection, a family/discretionary trust is best because that's the undisputed nature of such a trust. But it limits your negative gearing options.
For some (very limited) asset protection but you want access to negative gearing, a fixed unit trust is the best scenario because they are mostly fine with the ATO as long as you don't try to do dodgy stuff like redeeming units as soon as the property becomes neutrally geared.
As for asset protection, it can work but usually people want both tax AND asset protection together. Given the ATO's viewpoint on HDTs, it is hard to have both using a HDT. For concrete asset protection, a family/discretionary trust is best because that's the undisputed nature of such a trust. But it limits your negative gearing options.
For some (very limited) asset protection but you want access to negative gearing, a fixed unit trust is the best scenario because they are mostly fine with the ATO as long as you don't try to do dodgy stuff like redeeming units as soon as the property becomes neutrally geared.
Thanks. Do you have any links that might describe a few scenarios using Unit Trusts? I am trying to figure out why I would bother if it doesn't give me any (or significant) asset protection. I am sure it fits in certain plans, I would like to determine if it would fit my plans.
Will HDT's always be "on the nose"? Or will they redeem themselves.
Is it that there is no way to use them to balance asset protection with negative gearing without having the ATO rip you a new one each year?
EV
I think you should read this thread (even if you struggle!) as all the answers are here.
The Hybrid trusts that Chris is talking about are essentially unit trusts which enable the trustee to redeem the units at some time in the future. This will allow the unit trust to cover to a discretionary trust.
I think you should read this thread (even if you struggle!) as all the answers are here.
The Hybrid trusts that Chris is talking about are essentially unit trusts which enable the trustee to redeem the units at some time in the future. This will allow the unit trust to cover to a discretionary trust.
EV,
You will have problems wth finance as the title to the trust property will be in the trustee's name. But to claim a deduction the unit holder has to borrow to buy the units so the loan has to be in their name. The trustee and the unit holder cannot be 100% the same, otherwise there would be no trust in existance. So finding a bank to lend to Y with X's propety as security is the problem.
Units are considered property under the bankruptcy act. So they can be seized by creditors. This is different to discretionary trusts where no beneficiary has any vested interest in the property of the trust. Chris considered some stratgies to assist with asset protection above but it is still an issue with hybrid trusts.
Trust deeds will need amending each time there is a new law or a new interpretation of a law. No one could guarantee the deed will not need amending in the future because the future is unknown. All they can do is to draft the deed to try to head off any potential issues that could arise. Last year (or year before I think) the definition of income was finalised in the case of Bamford. This mean most deeds needed changing or updating to make sure this was reflected.
Trust law is extremely complicated and the tax side of trusts even more complicated. I am a lawyer and and still learning everyday - its like I learn 2 things and then forget 1, slow progress.
Sage advice
Thanks Terry. Much as I suspected.
Decision made, the most effective move I can make here is to maximise my time finding the best advisor I can that matches my style and strategy. (As well as challenging me to think differently.)
The search continues.
Thanks Terry. Much as I suspected.
Decision made, the most effective move I can make here is to maximise my time finding the best advisor I can that matches my style and strategy. (As well as challenging me to think differently.)
The search continues.
Sorry for the absence
My appologies for not posting for some time as the month of June is very busy for me and this has spilled over into July. I am back and happy to help where I can on the topics of trusts, hybrid trusts and the taxation of trusts.
For those of you questioning the use of hybrids and/or other types of trusts and suggesting they are too complicated I have previously said I will answer your questions and help where I can. I think you need to get some questions down and we can start to demistify trusts. As I think I have demonstrated I am happy to help and answer your questions to help any of you gain a better understanding of trusts, tax law relating to trusts and using trusts as an investment vehicle.
I have to admit a lot of the material I have seen over the last few months concerns me greatly. A lot of people are talking a lot of bull***** and only making the whole thing more confusing and hard to understand.
Chris
My appologies for not posting for some time as the month of June is very busy for me and this has spilled over into July. I am back and happy to help where I can on the topics of trusts, hybrid trusts and the taxation of trusts.
For those of you questioning the use of hybrids and/or other types of trusts and suggesting they are too complicated I have previously said I will answer your questions and help where I can. I think you need to get some questions down and we can start to demistify trusts. As I think I have demonstrated I am happy to help and answer your questions to help any of you gain a better understanding of trusts, tax law relating to trusts and using trusts as an investment vehicle.
I have to admit a lot of the material I have seen over the last few months concerns me greatly. A lot of people are talking a lot of bull***** and only making the whole thing more confusing and hard to understand.
Chris
JIT
A discretionary trust is created when a settlor (fancy word for the person who contributes the first amount of money) pays an amount, usually $10 to the trustee to start the trust.
Section 102 of the ITAA36 provides the Commissioner with the power to assess the trustee where the settlor or his or her children can benefit. Hence the settlor is normally someone who is not related and will never benefit.
Further amounts can be settled on the trust by other people, including beneficiaries. To settle is to gift. The subsequent settlements are the amounts being refered to in the PBR.
Chris
Emptyvessel
I thought I had covered a lot of material on this in this thread. I am happy to answer your questions if you want to ask them.
Banks stopped lending where a HDT was involved due to the ATO crackdown. Now that an accepted position has been arrived at I think you will find this has changed. The Banks I talk to are now willing to lend to HDTs.
This depends on how many units are on issue, the value of the assets being acquired and what your trying to achieve. The best asset protection vehicle is not always the best tax effective vehicle and vice versa.
I sold HDTs and am now charging for people to upgrade their HDT. It is not my fault the ATO changed their view. They had accepted my HDTs for over 10 years. Just because some people come along and trademark a deed and push it too far and spoil it for everyone isn't my fault. I am certain had it not been for the PIT none of this would be happening.
Chris
