hybrids

[julia]

From the ATO:

19 November 2008

Claiming interest deductions in certain uncommercial trust arrangements

We have released a draft taxation determination which provides the Commissioner's preliminary, though considered, view on interest deductions relating to money borrowed by taxpayers to subscribe for units in certain uncommercial trusts.

Draft taxation determination (TD) 2008/D16 follows Taxpayer Alerts 2008/3 and 2008/4, issued on 26 March 2008, which outlined our concerns about these arrangements.

Comments on the draft

We have had discussions with the members of the National Tax Liaison Group about this issue and we will be seeking their input and comments in relation to this draft TD.

We also invite your comments which can be forwarded to Simon Haines, as outlined in the draft TD, by 19 December 2008.

If you would like more information about draft TD 2008/D16 you can phone 1800 177 006 (option 4).

How are we currently dealing with uncommercial trust arrangements?

We are currently examining the conduct of entities involved in marketing these uncommercial trust arrangements and in a number of cases we are considering, or are in the process of taking, action against them under the promoter penalty laws which apply from April 2006.

Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by Taxpayer Alerts 2008/3 and 2008/4 should call the tax practitioner integrity service on 1800 639 745.

We are also working through various options to help taxpayers who have been involved in these types of arrangements to comply with their tax obligations. We will provide more detailed information about these options by the time this draft TD is finalised early next year.

Many of the trust arrangements we have examined involve cases where:

the taxpayer's entitlement to trust income is determined by the exercise of the trustee's discretion, rather than by the rights attaching to the units - meaning that the interest is not deductible, or
the taxpayer's entitlement to trust income and/or capital is disproportionately small compared to their contribution to the trust - meaning that the interest is not deductible in full and some apportionment of the interest deduction would be required.
Bruce Collins
Assistant Commissioner
Aggressive Tax Planning

 

[Loki]

Not so good at translating tax office sometimes. Looks like they still chasing only some hybrids? So hybrids doing the right things still ok, like Macquarie. Good to know

 

[julia]

A quote from the ruling:

"The terms of trust indicate that the taxpayer will not enjoy, or cannot reasonably expect to enjoy, all of the benefits flowing from the trust capital which he or she has funded with the borrowed money"

And makes the perfectly logical statement:

"If the provision of benefits to the other beneficiaryies was considered insignificant, or merely incidental to the assessable income to be provided to the taxpayer this complex structure would not be necessary"

 

[JIT]

Here's the link to the ruling:

http://law.ato.gov.au/atolaw/view.htm?docid=DXT/TD2008D16/NAT/ATO/00001

Julia...

What do you interpret from this point in the draft TD (point #36)? :

36. In this regard, the arrangements of the kind discussed in this draft Determination can be contrasted with cases in which a taxpayer uses borrowed money to purchase a single asset which produces assessable income and which may also result in a capital gain or loss on disposal of the asset. If the possibility of the taxpayer making a capital gain on the disposal of the asset is simply an incident of the acquisition and holding of the asset for the purpose of producing assessable income then the essential character of the interest expense will be for the gaining of assessable income rather than the capital gain.

 

[julia]

They are clarifying that this doesn't affect normal negative gearing arrangements. You see if the purpose of your investment is capital gain ie vacant land then you can't get a tax deduction for the interest on the loan because it is not a cost of producing income. They are just making it clear that by their discussions of analysing the reason for the investment and apportioning interest they are not in anyway implying that because you buy a rental for the purpose of earning rent and hoping for future capital gain, that you will have to apportion the interest.

 

[Rob G.]

I wonder if the ATO has ever knocked back interest on a loan to purchase News Corp shares ?

They have never been known to pay a dividend and are never likely to while Murdoch controls it !!

Cheers,

Rob

 

[THEHEATH]

They are clarifying that this doesn't affect normal negative gearing arrangements. You see if the purpose of your investment is capital gain ie vacant land then you can't get a tax deduction for the interest on the loan because it is not a cost of producing income. They are just making it clear that by their discussions of analysing the reason for the investment and apportioning interest they are not in anyway implying that because you buy a rental for the purpose of earning rent and hoping for future capital gain, that you will have to apportion the interest.

What about where the property is still running at a loss? You're obviously not buying it to produce income (in the short term) as it is running at a loss? Will they deem it to be ok because that property at some time in the future will go cashflow positive?

So in a nutshell, it looks like for the straight out purchasing/holding of rental properties Hybrid trusts can still be used to get the same tax deduction/benefits as if it were in a persons own name???

 

[redwing]

I wonder if the ATO has ever knocked back interest on a loan to purchase News Corp shares ?

They have never been known to pay a dividend and are never likely to while Murdoch controls it !!

Cheers,

Rob

As with many shares on the ASX

This used to confuse me in the past, with the ability to capitalise interest on a Margin Loan against shares, but not on a LOC against an IP (though this one seems to have been sorted).

I'm glad I'm not an accountant.....my head would explode

They are clarifying that this doesn't affect normal negative gearing arrangements. You see if the purpose of your investment is capital gain ie vacant land then you can't get a tax deduction for the interest on the loan because it is not a cost of producing income. They are just making it clear that by their discussions of analysing the reason for the investment and apportioning interest they are not in anyway implying that because you buy a rental for the purpose of earning rent and hoping for future capital gain, that you will have to apportion the interest.

 

[Piston Broke]

This used to confuse me in the past, with the ability to capitalise interest on a Margin Loan against shares, but not on a LOC against an IP (though this one seems to have been sorted).

As far as I know the ATO rule months back that capitalising interest on a LOC for an IP is ok.

 

[Francesco]

What about where the property is still running at a loss? You're obviously not buying it to produce income (in the short term) as it is running at a loss? Will they deem it to be ok because that property at some time in the future will go cashflow positive?

So in a nutshell, it looks like for the straight out purchasing/holding of rental properties Hybrid trusts can still be used to get the same tax deduction/benefits as if it were in a persons own name???

Someone in the know with the Tax Office has indicated that 'running at a loss' can be tolerated up to 2 years (understandable with huge upfront costs such as State stamp duty on RE), beyond that there is risk of audit.

 

[THEHEATH]

Thanks.

 

[Terryw]

Cleardocs has a new online article about this TD

http://www.cleardocs.com/clearlaw/tax/unit-trusts-loans-expenses-deductibility.html

 

[nonrecourse]

A quote from the ruling:

"The terms of trust indicate that the taxpayer will not enjoy, or cannot reasonably expect to enjoy, all of the benefits flowing from the trust capital which he or she has funded with the borrowed money"

And makes the perfectly logical statement:

"If the provision of benefits to the other beneficiaryies was considered insignificant, or merely incidental to the assessable income to be provided to the taxpayer this complex structure would not be necessary"

Hi Julia; That depends, my reading on this ruling highlights is that if you have income and capital units and you as the taxpayer are claiming all the income units but only some of the capital units you must have a good commercial reason not to be claiming all the capital units if and when then trust disposes of the asset.

 

[THEHEATH]

Cleardocs has a new online article about this TD

http://www.cleardocs.com/clearlaw/tax/unit-trusts-loans-expenses-deductibility.html

Excuse my lack of hybrid trust structure/working, but it doesn't give an example of where deductibility is 100% . Can you not be the holder of all units without nominating a discretionary beneficiary?

 

[davewill]

Excuse my lack of hybrid trust structure/working, but it doesn't give an example of where deductibility is 100% . Can you not be the holder of all units without nominating a discretionary beneficiary?

I thinks so, so option 1 with all units issued to borrower would give 100% (terms of the trust is that all income is proportioned to unit holders). Might as well buy in your own name.

 

[rodimus]

can i claim depreciation against my p-ersonal salary from the property that i hold under my hybrid trust????

 

[julia]

Rodimus - No you can't claim depreciation against your salary for a property held in a hybrid

 

[lizzie]

Rodimus - No you can't claim depreciation against your salary for a property held in a hybrid

why not - in a roundabout way?

as i understand it depreciation is claimable within the trust, so income would be rent, less operating expenses (pm, r&m, depreciation etc) = positive income to unit holder.

then unit holder claims positive income against negative mortgage interest payments = negative cashflow claimable against other income.

is this not right?

 

[lizzie]

I thinks so, so option 1 with all units issued to borrower would give 100% (terms of the trust is that all income is proportioned to unit holders). Might as well buy in your own name.

depends

if set up correctly, when the property held in the trust turns positive and the trust is converted to a discretionary trust (by paying out the unit holder), the positive income from the trust can then be split between beneficaries, or directed to the lowest tax paying beneficary, ie, to a non working spouse or split 50/50 between a retired couple so less overall tax is paid.

if you hold it in your own name, then when it turns positive you have no choice but to add the positive income to your own paye income and potentially pay a higher tax rate. even if retired, means you'd receive all the income and be thrown into a higher tax bracker quicker (and have less tax free threshold) than if the income was split.

 

[julia]

Lizzie,

Have your read the post that starts this thread?