Property Investor Trust - The Facts

I would not recommend a HDT. Depending on your circumstances DTs or direct ownership are high on my list of best solutions.
 
Hybrid trusts have not been proven through the courts and in PBR 66298 the ATO gives an example of a typical hybrid trust and states that the units cannot be negatively geared.
The conundrum with hybrids is that you need a fixed interest in the income and future growth of the trust to be able to negatively gear. If the hybrid has any discretion to distribute income or capital to beneficiaries other than the unit holders, then the interest is not fixed enough. Further if the unit holders have an absolute interest, then there is no asset protection for them.

If the units are redeemed so that the discretionary beneficiaries can get future profits then it must be at market value so a capital gain is triggered anyway. If you try to argue that the units are worth less than the underlying assets in the trust because they do not have all rights to those assets then you trip over the negative gearing requirements stated above.

If you use salary sacrifice with 1% 99% ownership you get all the negative gearing benefits and asset protection and it has been proven in the courts and with an ATO ruling. If you don't need negative gearing then a DT gives you maximum asset protection and flexibilty

I am as brief as possible here because the topic has been argued over and over again on this forum. If you need more detail please do a search on the topic
 
Seeking advice re suitable structure, accountant & financial advisor

Hello

I came across your forum while researching Chan & Naylor Accounts. I've seen previous posts back to about February 2006. There has been some great contributions.

I am new to the idea of using structures for property investment. I am also new to property investment.

1) I am located in Canberra (please don't hold that against me) and I am looking for a sound accountant who has a good handle on property investment issues, in the ACT or elsewhere that could help me with property and share investment issues.

2) My situation is really straight forward i.e. one person, one salary, taxed too much. I am looking for the best structure for my future investments (property and shares). Does anyone have any sound advice?

3) Also, the internet is a wash with property investment and tax educational products. Does anyone recommend of the materials that are out there?

4) Finally, I am seeking recommondations for a financial advisor/planner preferably in ACT or Sydney.

Thanks.
Kelly :)
 
What we learned from the ATO about Hybrid Trusts...

Over the last 3 years of negotiating with the ATO to achieve an ATO approved Product Ruling for our Property Investor Trust ® (PIT®) we have learned a few things that we thought was interesting to share.

Firstly some Background information:
The use of privately held trusts in Australia has had a long history dating back many decades. Over the years many taxpayers inadvertently began using trusts incorrectly and in some cases exceeded the boundaries beyond what was acceptable in the eyes of the ATO.

This national exposure led four years ago to the ATO reviewing their position with a specific focus on Hybrid Trusts. As a result in March 2009 a Tax Determination was issued TD 2009/17.

Unfortunately the 2009 Determination TD 2009/17 created significant confusion and lack of certainty regarding eligible interest tax deductibility in the marketplace at a client, advisor and accounting professional level.

In short it stated that the Uncommercial Use of Trusts could lead to the denial of full interest deductibility on borrowed funds.

Many well meaning and respected commentators including Accountants interpreted that to mean that ALL Hybrid trusts were illegal and many Practitioners ceased using Hybrid Trusts. This was compounded by the fact that many Banks also ceased lending to Hybrid Trusts.

Commerciality means that there must be a motive to make a profit. Some Trust Deeds were written where they would never make a profit and thus never need to pay tax.
For example when the property went from negative gearing to positive gearing and tax was due to be paid, some Trust Deed’s allowed an event to occur such that the positive rental was driven else where and no tax was ever payable.

Whilst many Hybrid Trust Deeds did not do this, the ATO took a blanket view and the Tax determination in 2009 created sufficient confusion that most people ceased using Hybrid Trusts. This was a great way for the ATO to win the war without the battle.

Whilst our legal advice, backed up by Queens Counsel was that a properly constructed Hybrid Trusts was fine and certainly our Property Investor Trust® (PIT®) fell into that category, the Tax Determination created sufficient confusion that many Accountants and commentators argued amongst themselves. We were divided into 2 camps:
Those for Hybrid Trusts and those vehemently against Hybrid Trusts.

In the meantime Andrew Forrest (Twiggy) of Fortesque fame took the ATO to court on a similar matter in respect to his Hybrid Trust.

Three High Court Judges ruled in Forrest’s favor namely ruling that interest was fully deductible for monies borrowed to buy income units in his Hybrid Trust. However, the ATO argued that apportionment (which was not in its draft ruling issued at the time) was not considered in the Forrest case and retained its position in the final Tax determination TD2009/17

Apportionment is when interest deduction is not fully allowable and maybe restricted to the net rental received by the taxpayer where the unit holder was not entitled to both income and capital.

A Tax Determination is not Law and it’s simply their view.
Of all the thousands of cases that end up in court it’s been reported that the ATO only win approximately 50%. Which means the other 50% of the time they have been wrong.
That excludes the thousands of cases where the Taxpayer had simply conceded without a fight even though they may have been legally correct but did not have the financial means to see it through the courts.

However the Tax Determination created enough confusion that those who were conservative in nature simply followed the Tax Determination and the ATO would have succeeded in stopping something that would have taken years to pass through Parliament.

Tax Determinations whether they are legally correct or not, is a cost effective and practical tool for the ATO to achieve their means.

The ATO PRODUCT RULING granted to the Chan & Naylor Property Investor Trust® or (PIT®) PR2011/15 brings certainty to the community and opens the way for others to pursue this course if they believe that holding a property in a Trust is for them.

This will have also opened the door for many Banks to once again begin lending to Hybrid Trusts. Certainly the Banks are lending to our PIT® with the evidence of an ATO Approved Product Ruling behind it.

This will have huge positive ramifications for property investors in Australia.


Is a “Product Ruling” the same as a “Private Ruling?”

A “Product Ruling” is NOT the same as a “Private Ruling”. Whilst some have been able to achieve a Private Ruling for themselves this is not automatically transferable to another Taxpayer. Relying on someone else’s Private Ruling in the hope that the ATO will also see your situation in the same light and the same facts is not recommended.

A Private Ruling is specific to the individual Taxpayer and may not be relied upon by another Taxpayer.

A Product Ruling such as the Chan & Naylor Product Ruling on the Property Investor Trust® or (PIT®) PR2011/15 is an approval on the Product itself and is applicable for all who own a Property Investor Trust Deed® as long as the ATO Conditions are followed strictly.

Our negotiations with the ATO have reviewed some major points (amongst many smaller ones) they wanted to see in one’s Trust Deed:

  1. There needed to be a fixed entitlement to both income and capital. Many Trust Deeds were not clear and left open the ability for the Trustee to distribute income and capital at their discretion.
  2. The Income Units needed to have some capital/market value attached to it
  3. The ATO would apportion the interest deduction if there was not a definitive fixed entitlement to both income and capital, meaning they would not allow interest deductions in full and maybe restrict it to the net rental income of the property.
  4. There must be Commerciality in your dealings meaning there must be an intent to make a profit, albeit it could be at a later date.

In summary the ATO will apportion the interest deduction if someone other than the tax payer can or will benefit from the transaction.

We hope this post helps the readers of this forum understand the background to the ATO’s challenge to Hybrid Trusts and in so doing assist you in structuring your affairs correctly.

Marco, in favour of Chan & Naylor
 
Marco,

I looked at your PIT and have to be 100% honest 2 major things put me off:

1 - Your fee charged for the initial consultation - I used to run a Financial Services business and i struggle having heard feedback from others who were very unimpressed by the initial time spent with yourselves why this is necessary, after all you are not giving specific advice as the disclaimer on your website clearly states.

2 - The lack of banks willing to lend to your PIT - I appreciate you will not want to name specific lenders/banks but please be 100% transparent on the number of lenders who are now offering lending following the ruling - Number of lenders and number of products available, % difference between available lending and that charged to the PIT to demonstrate if they class it as more risky etc.

Regards

ScottyB
 
Marco,

I looked at your PIT and have to be 100% honest 2 major things put me off:

1 - Your fee charged for the initial consultation - I used to run a Financial Services business and i struggle having heard feedback from others who were very unimpressed by the initial time spent with yourselves why this is necessary, after all you are not giving specific advice as the disclaimer on your website clearly states.

2 - The lack of banks willing to lend to your PIT - I appreciate you will not want to name specific lenders/banks but please be 100% transparent on the number of lenders who are now offering lending following the ruling - Number of lenders and number of products available, % difference between available lending and that charged to the PIT to demonstrate if they class it as more risky etc.

Regards

ScottyB

Hi ScottyB

1.
Not everyone needs a Trust and the initial consultation helps determine whether a Trust is the right vehicle for the client. We find that only around 60% of clients need a Trust whether that's a Discretionary or Unit or Hybrid or Blind or Bare or a Property Investors Trust®. If we were to put people into a Trust without determining whether they needed one or not, or indeed the right type because different types of Trusts all do different things, we would not be doing our job properly.
A recent example highlights why it’s dangerous to buy a Trust without a consultation first.

A client insisted on buying our PIT® without a consultation. After explaining that he needed to sign a Disclaimer if he bought a PIT® without a consultation, he reluctantly agreed to go through the process. During the consultation we discovered he did NOT need a PIT® because it was his first property in NSW and Trusts do not get a land tax threshold in NSW. They do in other States. Simply buying his first property in a Trust would have cost him $6,000 extra in land tax per year for no reason. Over 10 years that would have been a $60,000 mistake. The initial consultation cost became a wise investment. As he needed asset protection (high risk occupation) and he wanted to utilize his land tax threshold he was better off buying in his own name with an Equity Bank Trust to strip the equity from the property giving him full asset protection without costing him extra land tax.
So in this situation the PIT® was not appropriate for him. Another solution got him a better and cheaper outcome. He acknowledged the consultation was necessary and self diagnosis was dangerous. If he bought a Trust and ended up with a $6,000 per year land tax bill, that would be akin to a doctor prescribing medication without a diagnosis first. That's professional negligence.


If the property was in Qld than straight into a PIT® would have been ok as QLD grants a land tax threshold to Trusts. Different States have different land tax rules.


One needs to be careful; all clients’ circumstances are different. If he had other properties in his name and he had used up his land tax threshold in his name (NSW) then going straight into a PIT® would have been fine.


The 7 things one must consider when determining the best structure for a client are both the short and long term consequences of income tax, capital gains tax, land tax, asset protection, estate planning, spouse income and family planning.


The long term consequences must be considered because one's circumstances will change over time and when that happens it throws out your tax position. For example your spouse may go back to work or you were an employee one day and the next day you start your own business and asset protection becomes important or you have been promoted and the extra responsibilities means you now need asset protection. You are married one day and then divorced the next. Single today and married tomorrow. You have properties in your name due to being on the highest tax bracket and then you retire and it's now in the wrong name. Property goes from negative gearing to positive gearing. To change it triggers stamp duty and capital gains tax. But in a PIT® there is no stamp duty in most States on the changing of unit holders.

It’s not one size fits all. I know we are all in a hurry, and all looking at cutting costs but mistakes costs tens of thousands of dollars to fix. The stamp duty alone on changing the title (if bought in the wrong entity or your circumstances have changed) is around $25,000+ for the average property.


An ounce of prevention is better than a pound of cure.


In the past, if our Consultants recognize that the client’s situation is a simple matter and did not require a detailed analysis, we would not go ahead with charging a fee even though a fee was quoted. Or if a fee was already paid and the consultant discovers that it was a simple matter the fee would be refunded.


However, recently we have gone one step further, our Consultants (usually the senior Partner) would spend 10 minutes up front, FREE of charge, to determine whether
(a) it’s a simple matter in which case NO fee is charged or
(b) it’s a complex matter and would take several hours (usually up to 2 hours) to determine the right structure and then advise the client of the time involved and the cost.


Either way, the client would still be assessed properly before committing them to a Trust of any sort.

Despite the criticism, we don't apologize for insisting on an initial consultation to properly determine whether one needs a Trust or not, because the wrong assessment could cost the clients a lot of money.

Thank you for the feedback, we have taken on board your concerns and believe we’ve made the appropriate changes to meet market concerns.




2.
In terms of loans for the PIT®, "Chan & Naylor Finance" has never had problems finding loans for our PIT® s. We also have our own white labelled "Chan & Naylor PIT® loan" at very competitive interest rates. Many other Finance Brokers also have no problems. Try "Investors Direct" or "Metropole Finance". However the ATO Product Ruling was only granted in July 2011 so if your experience was prior to this date you may find it different now.
Many Banks did not lend to Hybrid Trusts because of the ATO's attitude to them. But with an ATO Approved Product Ruling on our PIT there is no reason why they should have a problem. Certainly we have had no problems other than the normal contraction of low doc loans as the Banks reacted to risk during and post the GFC.


When one buys a property in a Trust or a Company structure (not necessarily just the PIT®, but any Trust) it becomes a "Business loan" which means the loan goes from the Retail section of the bank to the Commercial section of the Bank. At the risk of sounding cynical, there are no commissions payable or the commission rate is greatly reduced via the Commercial section as opposed to the Retail section so there is reluctance for Brokers to put the loan application through the Commercial section. It's easier to simply say "the PIT® is the problem". As with most things it's knowledge and experience that gets things done and sometimes it's also who you know and not what you know.


Our "CN Finance" had to negotiate a commission from the Commercial section of the Bank so perhaps this can happen for other Brokers as well.

Further whilst our Finance department puts the loans through ANZ or St.George Bank or CBA but it's NOT ALL branches of ANZ etc that understand this as with most big banks the left hand does not know what the right hand is doing. They generally operate as silos.


CN Finance have negotiated and educated certain branches of the major Banks to understand the PIT®. The problems will be isolated to a "lack of knowledge and experience of the banker or Broker" rather than the PIT® itself. Certainly armed with an ATO Product Ruling for the PIT® this will be even more so.


The interest rates are the normal rates. There is no loading other than the normal LVR loadings which applies to all loans.


If you are having trouble why don't you try CN Finance or the other Brokers mentioned above?


I hope the above explanation helps.

Regards,
Marco
 
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