New Website for Batten

[Mry]

Coasty (and its great to see you back), I'm referring to the interest in the capital of the trust that the units were used to purchase, not all the trust corpus. The special income unit application refers to the income (which the person will pay tax on) but if Section 95 income (including capital gains) goes to the individual, doesn't that also include the entitlement to the funds underlying that? If the person redeems at $300,000, they should be entitled to that $300,000.

That seems to imply a right to that capital that application denies. If the unit application does not refer to a right to some capital of the trust, I feel it would run foul of IT 2684, which would still deny negative gearing.

This all seems too vague.

 

[julia]

Thanks Coastymike for your frank discussion on Hybrids. It seems to me they are only useful to mums and dads if you can redeem at CPI. So our big question is to Chris Batten. On your web site you discuss redeeming at CPI, do you have a ruling from the ATO that this is acceptable? If not is there a test case or ruling planned?

 

[JIT]

If someone negatively gears a property in their own name, and after 3 years has to sell the property (for whatever reason), and does so at a small capital gain, or even a loss (as the property has gone down in value over those 3 years)...that's still OK from the ATO's perspective isn't it?

And this is certainly not an uncommon scenario amongst mum and dad property investors is it?

So...if a unitholder negatively gears special income units in their own name, and after 3 years has to sell (redeem) the units (for whatever reason), and does so with a guaranteed capital gain on the units (as they made the commercial decision at the outset to have unit value linked to CPI) and have NO capital loss...then why wouldn't that be OK with the ATO?

Isn't this an even better commercial outcome for the investor, who has got a guaranteed capital gain now, whereas in the first scenario they may well have been faced with a capital loss?

Not ALL investment properties necessarily go up in capital value consistently year by year, or even in the long-term.

Now of course I know that the accountants here and the rest of us too are waiting for something 100% certain and in writing from a high court judge or from the ATO...but as it is now, why doesn't it make commercial sense?

Surely the ATO and Courts would take this into consideration rather than blindly apply a 'one size fits all' rule based on faulty logic?

 

[GreatPig]

Jit,

It doesn't make commercial sense to me because residential real estate historically grows on average 6%-10% pa, so if you are investing in a trust to buy residential real estate, why would you lock yourself in at CPI when the likely gain over the longer term is double or triple that? Of course not all properties do that, but that seems to be the trend.

I think the real test is would you still do it if it was someone else's trust, and you could only get what the units entitled you to? I think unless you were expecting a property price crash in the near future, and your time frame wasn't much past that, then you wouldn't want to limit your upside in this fashion.

GP

 

[JIT]

Jit,

It doesn't make commercial sense to me because residential real estate historically grows on average 6%-10% pa, so if you are investing in a trust to buy residential real estate, why would you lock yourself in at CPI when the likely gain over the longer term is double or triple that? Of course not all properties do that, but that seems to be the trend.

I just think it is a very 'commercial' decision that the investor/unit holder makes at the outset, and one that depends on their financial objectives, risk profile and immediate outlook on the market. Just the same as with any other investment.

You're buying for an income stream, and you may expect rents and overall yields to rise significantly in the short-medium term, hence creating a positively geared situation for the investor/unitholder, but may not be so sure that capital values will increase to the same extent during this time or beyond. You may opt for the guarantee of some capital gains rather than none.

I don't really know, but there must be some rationale behind Batten's decisions here, which I'm just postulating on at present...

 

[GreatPig]

I suppose in that sense it could be viewed similarly to fixing your loan because of uncertainty with interest rates.

However, my income units state that on redemption the unitholder will be paid the value of the units, provided it's not less than the price paid. No matter how commercial the decision to go for CPI indexing, is that really the "value" of the units if the attributable assets have not had the same capital gain?

GP

 

[JIT]

To get back to my last question, what would a purchaser of capital units in an HDT (or unit trust) be expecting for their investment? If they can't get income or capital gains, what can they get other than just their money back?

GP

Wouldn't a right to capital automatically include a right to income too?

Perhaps the purchaser of capital units would also have a right to contribute to decisions such as setting or increasing the rent, choice or change of tenants or property manager, involvement in body corporate decisions, maintenance decisions, whether to renovate or develop the property, when to sell the property etc...?

The special income unitholder doesn't have a say in ANY of these decisions do they?

If so...then how can you value the special income units according to the value of the underlying property??

It's NOT the same as the unitholder owning the underlying property directly, as by definition here they don't have a right to anything other than income (including capital gains)??

Therefore, you need an alternative way of valuing the units, eg. NPV, CPI etc..., the exact method will vary and be open to interpretation.

Does that make sense?

 

[GreatPig]

It's NOT the same as the unitholder owning the underlying property directly, as by definition here they don't have a right to anything other than income (including capital gains)??

Then they paid too much for it, as a right to income only wouldn't generally be worth the capital value of the property.

To buy just the rental income from a $500K property shouldn't cost $500K. With a 5% net return (better than you'd get around here right now), it could take 15-20 years just to break even, depending on how much rents went up during that time.

I think that's where the concept of income-only units as used in HDTs doesn't seem quite right. They seem to treat it like a term deposit, such that when you redeem you get your capital back as well as all the income while you're holding. To me that means the unitholder has an interest in the trust capital as well as the trust income, as to get your money back, the trust has to pay it out of the trust capital. So income units are really income+capital units, as the unitholder gets all the income as well as the capital attributable to those units. And I still can't see that a capital-only unitholder would get anything other than just his money back.

GP

 

[JIT]

Then they paid too much for it, as a right to income only wouldn't generally be worth the capital value of the property.

Yes, that's true. There goes my theory!

This one's for definitely the accountants....

 

[JIT]

Then they paid too much for it, as a right to income only wouldn't generally be worth the capital value of the property.
GP

Just another thought, sorry I can't help it! - does it really matter whether you paid too much or too little for the income units at the start?

People often pay too much for property, shares, managed funds, and other investments. People can and do 'value' various investments completely differently, based on numerous objective and subjective factors.

That doesn't make the investment less valid does it?

As long as you have a clear and 'commercial' income producing strategy for your investment over time, then shouldn't that suffice?

 

[rodimus]

In batten's site he says we can use our superanuation as deposit to fund a purchase of rental property. (if it is purchased in a hybrid trust?)
"You can use your super as a deposit on a rental property. " How does that work?

 

[Mry]

Probably by purchasing the property in a unit trust that complies with SIS legislation (ie the property is not used as security for another loan.

Remember, Chirs Batten uses the UT/HDT combination.

EDIT - And also to purchase property using warrants.

 

[GreatPig]

does it really matter whether you paid too much or too little for the income units at the start?

Too little may not matter from the unit holder's perspective, as then your return should be reasonable and more likely to cover your interest payments, but too much could be seen as an attempt to gain a negative gearing advantage.

As long as you have a clear and 'commercial' income producing strategy for your investment over time

"Commercial" would generally mean not paying too much more than it's worth. Of course if you can show how that's somehow better for the unit holder, as opposed to better for the trust or its other beneficiaries, then you may well have a case.

GP

 

[JIT]

Just another thought, if you had a HDT, and redeemed units at CPI value, then sold the property and streamed capital gains to lower income beneficiaries...and happened to be audited by the ATO with no problems...would that be re-assuring to other accountants here??

 

[julia]

Radical JIT so tell us about it

 

[julia]

Rodimus,

Paragraph 33 of Superannuation circular No. 111.A4 States:

However, the sole purpose test is unlikely to be satisfied in a situation where the investments of the fund and those of the employer-sponsor or some other associated person become intertwined. For example, joint ventures where trustees invest in a particluar asset or assets with the fund's employer-sponsor (such as an investment in real estate as tenants-in-common) may not, in certain circumstances, comply with the sole purposes test.

Ask for an ATO ruling first.

Superannuation and investment properties is addressed in the January edition of API.

 

[JIT]

Radical JIT so tell us about it

I'm just asking if it means anything (eg. like a PBR)...if the ATO is not sure or non-committal, will they just let it slip, and then later come back to you and say it's no go.

I don't know anyone with a HDT that has been audited, but I'm sure they're out there...whether they have passed the audit or not is another matter.

 

[Chris Batten]

Your Post

Thanks Coastymike for your frank discussion on Hybrids. It seems to me they are only useful to mums and dads if you can redeem at CPI. So our big question is to Chris Batten. On your web site you discuss redeeming at CPI, do you have a ruling from the ATO that this is acceptable? If not is there a test case or ruling planned?

Julia

You state that on my website that I "discuss redeeming at CPI". I thought I knew what was on my website and I can't find what you have said. Would you please direct me to where I said this as I can't find it. Obviously I don't want to be mis quoted as appears to be the case here and in other parts of this forum.

Also you state that "It seems to me they are only useful to mums and dads if you can redeem at CPI". May I respectfully suggest that you are missing something and it may be dangerous to make comments when not fully across the various issues.

May I suggest you read "Trusts and Estates" by Bernard Marks (excellent book), Practice Statement PS LA 2005/1 (GA) as well as the following court decisions:

Zeta Force Pty Ltd v. Federal Commissioner of Taxation 98 ATC 4681 at 4693; (1998) 39 ATR 277. See also Davis v. FC of T 89 ATC 4377; 20 ATR 548; (1989) 86 ALR 195; DCT v. Richard Walter Pty Ltd (1995) 29 ATR 644; (1995) 183 ALR 168; (1995) 69 ALJR 223; 95 ATC 4067 and FCT v. Prestige Motors Pty Ltd (1994) 27 ATR 160; (1993) 118 ALR 497; (1993) 47 FCR 138; 93 ATC 5021 (contrast Merkel J in Richardson v. FC of T 97 ATC 5098; (1997) 150 ALR 167; 37 ATR 452; (1997) 80 FCR 58).

I would also have a read of TR 2005/D4, TR92/20, TR95/25, TR2000/2, TR2003/9 and TR2005/12.

If you still come to the same conclusion then at least you can say you've done the reading and come to a considered opinion.

 

[GreatPig]

Chris,

You state that on my website that I "discuss redeeming at CPI". I thought I knew what was on my website and I can't find what you have said. Would you please direct me to where I said this as I can't find it.

You mention it in the video on hybrid trusts here as an alternative example to market value (that's purchase price + CPI of course).

 

[JIT]

Holy cow, the man himself!

Looks like we have some homework to do...