Hybrid trusts - should we go there?

[Blueberry]

I am going to consult a pro about this officially before we buy, but would like some opinions.

Basically hubby is on the highest marginal tax rate, I'm on zero income. Hubby is in an occupation where asset protection is recommended.

We are going to buy a CG property, which is likely to be negatively geared.

So to enable us to claim our losses we would want a unit or hybrid trust, preferably a hybrid due to increased protection.

Was reading this regarding the issue.

http://www.chan-naylor.com.au/what-learned-about-hybrid-trusts-ed-chan/

And I figure we can put a fixed split etc from the start. I but unsure about the intent to make profit. We'll that is our intention, but I was wanting to withdraw equity from these properties to fund further purchases. Is this ok? Is it only ok if it is within the same trust? Would we have to sell to use equity?

Is the whole thing too much of a minefield to even try? Do you have another recommendation?

I did think we could do some shorter term investments in my name where we suggest decide and sell (wouldn't be much tax after deduction s taken out if sell after a year.) or does anyone have another solution?

Thanks

Should I just buy in a discretionary trust with company head and write off the losses?

 

[geoffw]

First, in a discretionary trust, you don't lose losses- AFAIK you can carry forward the losses and offset them against future profits.

Second, there will be a stage at which you make profits, and if you fix the split, when the profits are made they will be in your husband's name. Even if you kept reinvesting, you will make profits at some stage. People suggest that there shouldn't be too many properties within one trust, as it dilutes asset protection- all assets within a trust could be liable if something goes pear shaped with one of the properties.

Third- unless you've bought a property, there are things you can do to at minimum, minimise losses early on, while still getting capital growth. This could be by buying something with two or more streams of income, building somethings with a second stream of income (say granny flat or subdividing), or by renovating. Or you could have another investment within that trust which produced profits.

Things can also change. I was always sure that I would be the highest income earner- but then we bought a business from which I was drawing a small income, much smaller than my wife's. The discretionary trust enabled us to distribute income from the (quite) positively geared property which was in a trust in the most tax effective way. The business also ran from a trust.

If there's not too many years of loss, and your income can afford it, I'd be a fan of going with a DT.

(But seek professional advice).

 

[Shahin_Afarin]

Can't comment on the tax side of things but from a finance side of things you will have restrictions on both on LVR and the lenders that will actually lend to HT's.

Regards

Shahin

 

[Blueberry]

Can't comment on the tax side of things but from a finance side of things you will have restrictions on both on LVR and the lenders that will actually lend to HT's.

Regards

Shahin

Looks like going back to thinking discretionary trusts is a good idea

 

[Terry_w]

I am not sure what benefits a hybrid trust would give you. To be able to claim the interest in full on the money borrowed to buy the units the trust deed would need to be drafted so that the unit holder received all the income and capital gains from the trust.

To do this the loan would need to be in the individual's name but the title would be in the trustee's name. The individual couldn't be the trustee either. THis is why it is difficult to get finance.

Because the person owns the units there would be little to no asset protection either. The units are property which would fall into the hands of creditors if the individual went bankrupt. They could then control the trust and sell the property distributing the proceeds to themselves. Some drafting could make this more difficult, but it would still be a possibility.

The hybrid also would not qualify for the land tax threshold in NSW unless it is a fixed unit trust - which means no discretion.

 

[RPI]

I agree, Hybrid's are messy. I am concerned about the level of asset protection afforded by them.

 

[Aaron_C]

Hybrid trusts sound good in theory but in practicality the ATO can peel them apart like opening a can of peaches. Why else would you put an asset in a hybrid trust but for tax avoidance/minimisation? The presumption is already one of guilt, trying to rebut that is difficult. It's just like those people who were busted for opening bank accounts in the Caymans (Project Wickenby) - what other good reason would you have if you weren't doing business there? Easy meat.

 

[Terry_w]

Hybrid trusts sound good in theory but in practicality the ATO can peel them apart like opening a can of peaches. Why else would you put an asset in a hybrid trust but for tax avoidance/minimisation? The presumption is already one of guilt, trying to rebut that is difficult. It's just like those people who were busted for opening bank accounts in the Caymans (Project Wickenby) - what other good reason would you have if you weren't doing business there? Easy meat.

Aaron, I think you misunderstand hybrid trusts. There are many reasons why someone would what to use one. You may want person A to receive income but persons A B or C to get any capital for example. No discretion for the income but discretion for the capital.

 

[Aaron_C]

Aaron, I think you misunderstand hybrid trusts. There are many reasons why someone would what to use one. You may want person A to receive income but persons A B or C to get any capital for example. No discretion for the income but discretion for the capital.

Sure, Terry - I accept that. Then you have those PIT (c) that do funny stuff with how the units are redeemed to unitholders etc - what is the purpose of that in the deed I wonder?

 

[Terry_w]

Sure, Terry - I accept that. Then you have those PIT (c) that do funny stuff with how the units are redeemed to unitholders etc - what is the purpose of that in the deed I wonder?

That one has a trademarked name so it sounds good. People may think it is a special patent on the process or similar.

There was a lawyer many years ago who tried to patent a strategy involving trusts - and he failed. He appealed it and lost and then sought leave to appeal to the High Court and was turned down.