hybrid trusts- are their any disadvantages?

[jewels]

Hi there, I am new to this forum, and if anyone can give me some advice on trusts, would be much appreciated!
My husband and I currently own a few IP in our personal names, as a total package they are negatively geared. So obviously we get the tax benefits against our personal names. we have been told we should consider buying our next IP in a hybrid trust, apparantly we can still offset the tax to our personal returns, and also pick each year who will get the most income, our current emplyoment incomes are quite low anyway, but they do change each year, of who is the highest income earner between us.
These trusts sound too good to be true, are they? or am I missing something here? I am not that interested in assett protection (although I should be) just trying to get my head around the good and bad of these trusts???

 

[GreatPig]

There is a lot of debate about the usefulness of HDTs now for negative gearing. If you search the forum, you'll find numerous threads discussing the issues.

apparantly we can still offset the tax to our personal returns, and also pick each year who will get the most income

I don't agree with the "and also" part. To negative gear you need to issue units, and once you do that income has to be pro-rated across the issued units. So if two people are issued the same number of units, then they have to receive half of the income each. To change the ratio of issued units without altering the funds in the trust, one person would have to sell some to the other at market value, generating a capital gains event. At least this is my understanding based on all the discussion you can find in those other threads.

I'm not sure about Queensland, but here in NSW I believe property purchased in a trust loses the land tax threshold, so you have to pay more land tax than you would if it was held in a personal name.

Finally of course there's the ongoing administration costs of a trust.

GP

 

[Michael Yardney]

There's been lots said about Hybrid Trusts by the accountants .

In the last issue of Property Update we ran an interesting article - Hybrid trusts - is this the end by Ed Nixon - giving a finance broker's perspective.

It's worth reading.

 

[Rob G.]

Leaving aside the possible double incidence of CGT which still has Advisors ducking and weaving to avoid answering ...

... I must point out that assets are NOT protected where there are interests held by unit holders.

Cheers,

Rob

 

[lizzie]

no land tax threshold ... so i believe.

the thing i like about an hdt is that the higher income earner can claim negative deductions, then when the property turn positive the trust changes and the lower income earner claims the income

 

[geoffw]

no land tax threshold ... so i believe.

the thing i like about an hdt is that the higher income earner can claim negative deductions, then when the property turn positive the trust changes and the lower income earner claims the income

I believe the same things applies to a standard family trust.

The difference is that, when the property in question is negatively geared, nobody can claim the deductions.

There are still question marks about HDTs, as I understand. They were always a way of trying to get the benefits of negative gearing, along with the flexibility of distributing losses and gains in the same way as a family trust.

 

[Pat]

Gee I think there may be a few people thanking their foresight of investing in a HDT if the property market flattens in the coming few years or even goes down in areas. Imagine in 3 years time and your property value is below what you bought it for. In this macroeconomic situation you will probably find interest rates are low and rents have been increased.

In this instance you could crystallise a capital loss in your own name, refinance the property back to the trust which maybe close to positively geared and then sail up on the ensuing 5 years of excellent capital growth with the benefits of discretionary revenue income and discretionary capital gains distributions. Can't do that if the property is in individuals names or a discretionary trust name.

This could well be a scenario for many investors.

 

[Rob G.]

Congratulations Pat !

This is the first scenario I have seen where the numbers might stack up for using a HDT for simple property investment.

Of course if the main purpose was to limit losses and not derive assessable income, at the very least negative gearing might be questioned by the ATO (Fletcher's case).

Cheers,

Rob

 

[DavidMc]

Downsides are they cost money to setup, run and increase the complexity of your investing (i.e. another tax return).

Also certain deeds can get you into trouble with the ATO.

 

[Pat]

Congratulations Pat !

This is the first scenario I have seen where the numbers might stack up for using a HDT for simple property investment.

Of course if the main purpose was to limit losses and not derive assessable income, at the very least negative gearing might be questioned by the ATO (Fletcher's case).

Cheers,

Rob

Thanks Rob your glee is heart warming,

Of course we all want to earn assessable income but sometimes the world can change and a HDT has some flexibility where no other property investment structure does.

I'm sure Opus Prime investors are going to offset their losses against any future Capital Gains, gees I hope the Commissioner doesn't put a stop to that on the argument that they wanted to make the losses in the first place.

 

[Loki]

Not sure what Opmus Prime is (transformers? lol).

I have hybrid trust for some properties. Trust units can't be given back to trust for less than paid for? Maybe wrong. Accountant give me papers for this one year. If can't give back for less, no capital loss? Wrong thinking?

Maybe I should ring accountant, not play accountant on forum.

 

[Peter_Tersteeg]

From a financing point of view there are limitations appearing with HDTs. Strickly speaking the article by Ed Nixon is correct but even then there are exceptions. For example, BankWest will continue to support HDTs for existing customers, but no new HDTs are allowed. LMI sometimes causes a problem these days and Lo Doc options are very limited.

Using a HDT does limit your options. It also limits your options in the future. I'm a big supporter of HDTs but I have seen situations where people just couldn't move forward because they used a HTD. This is an exception though, in most cases people are fine with HTDs.

I also think as the credit market improves, lenders will start to open up their policies again and they could become more mainstream again.

 

[Loki]

Rang accountant, he said play all i like, everyone else does. He said redeemed is right word for giving units back to trust. Redeemed. Will try remember that. Memory not all so good. Wrote down next part he told me. Said "the value shall be deemed to be not less that the amount paid by the holder".

Maybe he uses different trust, not as good as pats hdt? Doesn't matter. Units not gone down in value yet.

 

[Ms Jade]

My advice is to make sure that you check your serviceability with the financial institutions that will definitely lend to this structure. I set up an HDT some years ago only to find that after signing contracts I couldn't get the deal through with any of the lenders. Granted, I was sailing close to the serviceability abyss, but after the not inconsiderable expense to set up the trust, I could only get finance in my own name.

 

[AVD]

On advice from a trusted source the units can be redeemed less than cost if the market falls.

The unitholder can crystalise this loss in their personal tax return to offset future gains. Yes, this is using Pat's HDT's.

Regards,

Alysha

 

[austini]

On advice from a trusted source the units can be redeemed less than cost if the market falls.

The unitholder can crystalise this loss in their personal tax return to offset future gains. Yes, this is using Pat's HDT's.

Regards,

Alysha

If that's the case then MGS have obviously updated their HDT Unit Issue Form in relatively more recent times. Many of us who originally setup HDTs a few years ago were provided with forms that only allowed redemption of units equal to or greater than the amount paid for the originall units.

Such is the life of a HDT - always changing and still yet to be tested by law!

Cheers - Gordon

 

[Ebbie]

Interesting.

I have an MGS Hybrid Trust deed and like Gordon the Application for Special Income Units I was provided with says: "A holder of Special Income Units whose units have been redeemed by the Trustee in accordance with the provisions of the Deed establishing the Trust shall be entitled to receive from the Trustee, by virtue of the redemption, an amount equal to the value of the units redeemed calculated at the date of redemption PROVIDED THAT the value shall be deemed to be not less than the amount paid by the holder (or predecessor in title) of such units to the Trustee in respect of the issue of the units."

So why has this now changed?

 

[Pat]

Hi Ebbie,

As you know units issued in a HDT have a value related to the market value of the property, if that value is less than cost then that is what those units are worth. Your original documentation can be reviewed in light of the changed view of the ATO.