Just like GSJ, I have difficulty in understanding what ‘capital return’ means in the PBR. Does it mean the market value of units at some point in time or at redemption, or just the value of the initial purchase price of units? Can someone clarify that for us?
Looks like 'capital return' as in the following clauses includes capital growth, not only the initial capital that is used to purchase units.
An interest expense is not fully deductible in those cases where the expected return from the units, both income and capital growth, does not provide an obvious commercial explanation for incurring the interest
...., it is necessary to apportion the interest expense for the following reasons:
as the capital return under the trust remains discretionary, the expected capital return from the units cannot be quantified.
This means, to be able to deduct interest fully, the unit holder should be entitled not only to the income but also to the capital growth (at redemption? at market value?). The consequence of this is, as alexlee pointed out earlier in this thread, it undermines the asset protection and CG streaming ability of the trust. On the other hand, if the unit holder is not entitled to the capital growth, as ATO puts it where
'the capital return under the trust remains discretionary', then the interest is not fully deductible, affecting the negative gearing value of HDTs. This looks like a real problem at least for the deed in question.
I think this is another point that may have an affect on HDTs in general.
as you have advised, there is a private purpose or motive for establishing a hybrid trust and purchasing units in this trust, where the capital return is discretionary. Your purpose is to obtain the private advantage of asset protection given because due to your occupation you have a high exposure to legal action against you. Therefore, the nature of your interest outgoing will not have the character of an outgoing fully incurred for the purpose of gaining or producing assessable income.
…
In conclusion, apportionment of the interest expenses is necessary in respect to your purchase of units in the trust because the nature of your interest payments do not have the character of an outgoing fully incurred in producing assessable income or of an outgoing fully incurred in a transaction with an obvious commercial explanation. This is because your motives for purchasing units in a trust where the capital return is discretionary include the private purpose of asset protection. Being so, your interest expense is only deductible up to the extent of the assessable income actually received.
Now does this mean for the interest expenses to be fully deductible, the purpose of the cost/expense should only be for gaining or producing assessable income, but there cannot be another purpose or motive, such as asset protection?
I’d like see what others think.
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