Hybrid Trusts

[Bantam Roosta]

HYBRID TRUSTS
Q. I am looking into setting up a trust to hold some investments, which will be negatively geared. I have become aware of a hybrid discretionary trust structure that some property investors are using to hold negatively geared property, which gives them the tax and non-tax advantages of family trusts.

A hybrid trust seems to be a combination of a discretionary and a unit trust. Have you any advice in regard to the advantages and disadvantages of using a hybrid trust in this context?

A. A hybrid trust is a trust which is non-discretionary for some capital and/or some income and discretionary for the balance.

However, the tax features of negative gearing do not depend on the type of trust. They do depend on the total trust portfolio, as trust losses cannot be distributed to beneficiaries. Thus unless there are other trust assets generating sufficient profits the net losses can only be carried forward.

In regard to the more general matter: In the absence of special circumstances, a discretionary trust, with its complete flexibility, would normally be more useful than a wholly or partly unitised trust.

I just found this FAQ on the net when looking for trust information.

From what I had gathered, the reason Hybrid trusts are used is so that -ve gearing benefits can be passed on to the beneficiares. If I have understood the above correctly this is saying that you cannot. My confusion concerns me because I have seen this author in most major book stores and have considered buying his stuff in the past.

Thank you,

BR

 

[Ajax]

Hi Bantam Roosta,

I think you need to consider the expenses relating to a property held via a hybrid discretionary trust in terms of interest expense and property outgoings. The following is my understanding (which stands to be corrected).

The interest expense is incurred by you on monies borrowed to buy capital units in the HDT.

The property outgoings (apart from interest expenses) are netted off against rental income from the property held by the trustee for the benefit of the trust. It is this net income (which is positive) that is distributed annually to beneficiaries in an HDT.

It is correct to say that an HDT or a standard discretionary trust can not distribute trust losses for tax purposes.

Ajax

P.S. I see you are living in Katherine. Any comments on the property market there? I see Katherine has rental returns around 8%...are prices moving up like Darwin?

 

[Mry]

That FAQ answer seems a bit weird. They start talking about HDTs and then it leaps into plain Hybrid Trusts, ones that operate with units and discretionary powers simultaneously. I don't think that question and answer was thought through properly.