Meet the (HDT) Knockers!

[julia]

Alexlee,

Alexlee wrote - Say I have shares in a DT that has $700 in franked dividends + $300 franking credits. Am I able to distribute franking credits to one beneficiary and the dividends to another beneficiary? Or do I have to follow the same franking %?

The franking credits have to be apportioned at the same rate the franked dividends were apportioned. But as you can now get a refund of the franking credits this should not cause you any problems.

TR 92/13
2. A resident beneficiary of a trust estate (other than a company or trustee of another trust estate) is entitled to a franking rebate if:

a share of net trust income is included in the assessable income of the beneficiary; and
some or all of that share of net trust income is attributable to a franked dividend included in the assessable income of the trust estate.

Alexlee wrote - Also, in the above example if I distribute $1,000 to another trust that has a net loss position, can the trust get a refund for imputation credits?

The other trust would probably have to make a family trust election. It would also need to have at least a dollar in profit then distribute the profit to a beneficiary who could then claim the franking credits on the basis that they were the only beneficiary so they must have indirectly got 100% of the franked dividend before deductions were allowed for. Note there can be more than one beneficiary just pro rata. I just used one beneficary to make it simple to explain (I hope).

 

[alexlee]

Thanks a lot, Julia.

The franking credits have to be apportioned at the same rate the franked dividends were apportioned. But as you can now get a refund of the franking credits this should not cause you any problems.

I see. I was just thinking whether I can sever the franked dividends with the franking credits. If I can't that's fine.

The other trust would probably have to make a family trust election. It would also need to have at least a dollar in profit then distribute the profit to a beneficiary who could then claim the franking credits on the basis that they were the only beneficiary so they must have indirectly got 100% of the franked dividend before deductions were allowed for. Note there can be more than one beneficiary just pro rata. I just used one beneficary to make it simple to explain (I hope).

That makes sense. So even though the trust nets off taxable income against losses (such as -vely geared property) because franking credits are in reality tax credits and the trust can't use them, they can be claimed at the beneficiary level.

Are there any restrictions to making a family trust election other than the fact that you can only distribute to family members and entities associated / owned by family members?

My problem is I know enough about accounting and tax to think up weird strategies, but not enough experience to know whether it's legal......
Alex

 

[Simon]

I am not an unintelligent man but I find all this quite daunting - especially the prospect of keeping it all maintained so as to keep the ATO happy.

Is the day to day running as difficult as it seems or is my lack of experience just making it look too hard?

 

[JFisher]

I am not an unintelligent man but I find all this quite daunting - especially the prospect of keeping it all maintained so as to keep the ATO happy.

Is the day to day running as difficult as it seems or is my lack of experience just making it look too hard?

Im hearing you Simon! Which is why I quickly bailed out of the thread that I started. I decided to speak to an accountant who does do trusts and was referred to Qlds007's accountant. He simply explained that as we can already stream our income equally (self employed) we don't really need a HDT anyway. But what we should do to protect our assets from any business liabilities is to form a company for our building business(instead of a current partnership structure), make Daryl the only director, make me a 99% owner of PPOR, buy IP's in a simple DT.
I must say that of the three forums that I posted this identical thread in, this forum had the most in depth answers and I am sure that they are not finished yet. Thanks everyone, I, personally, got all my anwers from your advice and I hope you all sort out your situations and/or your clients situations soon. I think I will be a fast follower rather than a early leader considering the possible changes re HDT's.

Julie

 

[Les]

G'day Chris,

Bye the way evertime I go to post it says I am logged out when the first thing I did was log in.

Sim told me a long time ago "Don't ever Log out" - I've never had to Log in since. And, yes, I believe I have the "Remember Me" box ticked.

Regards,

PS Chris, thanks so much for your input to the forum. It is hugely appreciated..

 

[kmranu]

....
Here's the kicker - "The rental property will be a residential property. A rental agreement will be entered into between the Unit Discretionary Trust and a Company providing serviced accommodation. The rental agreement for the property will be for a period of 10 years.
.....
So if you want this to work, you have to have an additional company and a 10 year agreement as described above.

In fact, now I am even more confused. Does that mean for neg gearing to be allowable, there must be a company and a 10yr agreement with it? I was not aware of this condition before. Can Mry and other HDT users confirm that or have I missed something here?

I wonder how many HDTs have a 10yr rental agreement with a company. I'd really like to hear from those who invest through HDTs.

 

[DaleGG]

Hi

I invest using a HDT. Two of them, in fact.
No, a 10 year rent agreement is not required and neither is a company. The rent should merely be to an unrelated party and at commercial rates of return (income and CG).

As Chris Batten has suggested.....we will soon have a much clearer picture of what the tax office is thinking.

Dale

In fact, now I am even more confused. Does that mean for neg gearing to be allowable, there must be a company and a 10yr agreement with it? I was not aware of this condition before. Can Mry and other HDT users confirm that or have I missed something here?

I wonder how many HDTs have a 10yr rental agreement with a company. I'd really like to hear from those who invest through HDTs.

 

[Mry]

I was just pointing out some of the distinguishing characteristics of the ruling that make it different from most other rental operations. Who here would be comfortable signing a 10 year lease? I wouldn't feel comfortable doing more than 2 years. I can't help feeling that the ATO felt more comfortable giving a positive ruling based on the more-or-less guarantee that the trust would operate as it stood for the next 10 years, not accounting for income unit redemption and/or property sale.

While I like and agree with the conclusions, I remain hoping that the ATO grant a ruling based on a more standard setting.

 

[DaleGG]

Hi

At the risk of stating the obvious here..... it is my understanding that Chris has been misunderstood by some people.

When Chris talks abt putting trusts up in front of the tax office and having them rejected, he is talking abt some of the inferior trust deeds found in todays market. Chris is not talking abt his own trust deeds or the MGS trust deeds failing with the tax office. I understand that Chris's deeds have been unoffically approved and hopefully we will have official approval within the next week or two.

I hope that this helps allay some of the fears and concerns that I have heard of late.

Dale

about

GSJ

I have been in discussions with the ATO for the last 6 months concerning hybrid trusts and what is acceptable and what isn't acceptable. The ATO is about (next 6 to 12 months) to issue a statement concerning hybrids.

Suffice to say the majority of hybrids I put to the ATO were knocked back on the basis that the interest expense would either be apportioned or disallowed in full.

I stopped posting on the site as I was attacked by anonymous people representing the demtel salesforce in trust deeds. I will let Coasty Mike, Nick (Stavro) and Dale GG know the results of my discussions.

As for the Hybrid knockers I think they are entitled to their opinions and if there concerns can't be addressed then they probably have some good points.

Hybrids aren't for everyone or every situation. It's not like you can wrap it up in fancy wrapping paper, trademark it and claim it does more than it really does.

All the best.

 

[Ebbie]

At the risk of stating the obvious here..... it is my understanding that Chris has been misunderstood by some people.

When Chris talks abt putting trusts up in front of the tax office and having them rejected, he is talking abt some of the inferior trust deeds found in todays market. Chris is not talking abt his own trust deeds or the MGS trust deeds failing with the tax office.

Suffice to say the majority of hybrids I put to the ATO were knocked back on the basis that the interest expense would either be apportioned or disallowed in full.

I'll admit it wasn't obvious to me either.

I was quietly sitting here thinking I had purchased an MGS trust deed that had been knocked back by the tax office! Thanks for clearing that up Dale.

 

[Mry]

If you want to be as safe as can be, the MGS deeds are highly recommended.

 

[julia]

Wasn't that obvious to me either Ebbie. Seems strange that a solicitor would choose his words so poorly. Are you out there Chris? We wait in suspense for your next installment.

 

[julia]

Have a look at this:

http://www.ato.gov.au/rba/content.asp?doc=/rba/content/66298.htm

 

[Terryw]

I have read the ruling, but cannot get my head around it at this stage. But, it does seem that the deed in the private ruling is not a MGS deed. I compared the paragraphs mentioned in the ruling to one of MGS's deeds and they don't match up.

 

[DaleGG]

Hi Terry

Aaaah! God love you, son. We wondered whether anyone would notice that the wording of the deed in the ruling might have been a problem.

Still, hopefully the tax office will be able to provide Chris Batten with a definitive answer sooner rather than later to put an end to a lot of the posturing and guessing that we presently see.

Dale

I have read the ruling, but cannot get my head around it at this stage. But, it does seem that the deed in the private ruling is not a MGS deed. I compared the paragraphs mentioned in the ruling to one of MGS's deeds and they don't match up.

 

[julia]

Some of the quotes in the PBR re the wording of the deed:

The corporate trustee has the power at any time to create capital or income units in the trust.

If units have not been issued the trustee has the discretion to distribute income and capital to discretionary beneficiaries of the trust.

THe trust will provide the rental property as security for your borrowings.

You as the only unit holder are entitled to all of the income of the trust and the trustee of the trust cannot issue further units of any kind without the express written permission of the unit holders

Once the units are issued the trustee in accordance with the terms of the trust will distribute all the income of the trust to the unit holders each income year.

The trust deed provides that a unit holder in the trust has a present or fixed entitlement to the trust income. Clauses 5 and 9 of the trust deed state:

Subject to clause 9, the trustee may at any time before the end of each financial year and from time to time up to and incuding the vesting day (a) pay, transfer or set aside all or part of the income to or for any or all of the beneficiaries

THe trustee cannot vary or alter the rights and restrictions attaching to an income unit after it has been issued.

If there are income units existing the Trustee must pay all of the income to income unit holders divided equally between each income unit and in accordance with their respective unitholding.

If there are income units existing the Trustee cannot exercise the discretion in clause 6 of this Deed with respect of the income.

If there are income units existing the trustee cannot issue further income units without the written consent of alll income unit holders


Has anyone any recommendations on how this should be worded so not caught by the PBR?

 

[JIT]

Income includes capital gain, so if this is also distributed to unitholders then it should be commercially viable?

This PBR mentions 'capital distributions are discretionary', but I don't know what exactly this means...capital gain should be treated as income, and not discretionary, but go to the unitholder, at least while special income units are on issue?

Also a special income unitholder does not have rights to 'capital', only income.

This is my understanding of the conservative HDT approach with an appropriate trust deed. But this PBR does not seem to reflect that? Just a lay person view though...

Julia, I think you've shown us this PBR or bits of the tax rulings before in another thread, but I am not so sure it is a clear 'blow' to all HDT's just yet...but it's always good to hear the alternative view...and yes, as Dale says, we should have this cleared up very soon.

Thanks,

GSJ

 

[NigelW]

Has anyone any recommendations on how this should be worded so not caught by the PBR?

Well of course they do Julia...

but usually people pay money for advice about the drafting and legal effect of documents...you see there's these guys and girls - let's call them "law talking types" that have the temerity to charge people for preparation of legal documents...

Almost as bad as those "bean counters" who have the temerity to charge people for helping them with their tax...

Cheers
N.

 

[julia]

Almost as bad as those "bean counters" who have the temerity to charge people for helping them with their tax...

You need to have a look at the free publications section of www.bantacs.com.au. Enjoy all the free info you need.

 

[NigelW]

Julia your free booklets are a great free resource and it is very generous of you to provide them to all and sundry.

But things like your rental property salary packaging kit are not free (which is entirely appropriate and the price looks very reasonable to me...). No doubt you charge for that product because it contains valuable intellectual property and you should get paid for it.

The point I was trying to make was merely that your question is an unfair one because to properly answer it requires disclosure of valuable intellectual property. It would be a bit like asking you to disclose the contents of your kits which are for sale.

I'm sure the question was asked in good faith, but I would not like people to think that the absence of an immediate response means there isn't an answer.

Cheers
N.