Purchasing property - Trusts - Discretionary vs Hybrid vs Own name

[reeco]

Yes you could use a unit of hybrid trust. You borrow money to buy units and then you personally claim the interest. This may result in you being able to claim the losses from interest initially.

But, what is the point? Why not buy in your own name instead.

I'd rather have control and not have it in my name. As noted prior, there are other benefits to hybrids. Sure it cost more to maintain and but as a summary from the book "trust magic" which was confirmed by a CPA last week

1. A hybrid trust is a cross between a unit trust and a discretionary (or family) trust which enables an asset to be owned through a trust and still allows the individual to take advantage of the short term negative gearing benefits if the deed is worded properly.

2. The hybrid trust effectively converts to a normal discretionary trust when the short term benefits have expired.

3. A hybrid trust allows two different people to use a trust to own businesses or properties using a simple structure rather than a more complicated one. This, in turn, will save money on professional fees such as accountants.

4. The hybrid trust could save a substantial amount of money in stamp duty if you choose to transfer the property held within the trust to your own self managed superannuation fund on retirement.

 

[Terryw]

I'd rather have control and not have it in my name. As noted prior, there are other benefits to hybrids. Sure it cost more to maintain and but as a summary from the book "trust magic" which was confirmed by a CPA last week

1. A hybrid trust is a cross between a unit trust and a discretionary (or family) trust which enables an asset to be owned through a trust and still allows the individual to take advantage of the short term negative gearing benefits if the deed is worded properly.

2. The hybrid trust effectively converts to a normal discretionary trust when the short term benefits have expired.

3. A hybrid trust allows two different people to use a trust to own businesses or properties using a simple structure rather than a more complicated one. This, in turn, will save money on professional fees such as accountants.

4. The hybrid trust could save a substantial amount of money in stamp duty if you choose to transfer the property held within the trust to your own self managed superannuation fund on retirement.

its what the book doesn't tell you that is important.

Firstly what is the benefit of having it in a company name rather than your personal name - there are some, but probably not as much as you think.

Then the potential double CGT of a hybrid. When you sell your units back to the trust (so it can convert into a discretionary) you will pay CGT on the increase in value. When the trustee sells the property there may also be CGT payable on that.

The most important consideration is the difficulty in getting finance - and the risk that bank policies will change and get even tighter down the track. You don't want to be left with a property which you cannot get increased finance on.

 

[reeco]

its what the book doesn't tell you that is important.

Firstly what is the benefit of having it in a company name rather than your personal name - there are some, but probably not as much as you think.

Then the potential double CGT of a hybrid. When you sell your units back to the trust (so it can convert into a discretionary) you will pay CGT on the increase in value. When the trustee sells the property there may also be CGT payable on that.

The most important consideration is the difficulty in getting finance - and the risk that bank policies will change and get even tighter down the track. You don't want to be left with a property which you cannot get increased finance on.

Agreed tho I believe finance is simply harder, but not necessarily difficult. Also the points you mentioned mean little to a person who intends to never sell assets within that type of trust. It is after all only one trust of a possible many. If I want I can have the benefits of both by simply purchasing homes in my name aswell. Homes that I actually do wish to sell at some stage.

 

[alexlee]

Have you considered the CGT that will likely be payable when you convert the HDT into a discretionary trust? By the time the property becomes tax positive, it's likely many years have passed, resulting in a hefty CGT bill.

 

[reeco]

Have you considered the CGT that will likely be payable when you convert the HDT into a discretionary trust? By the time the property becomes tax positive, it's likely many years have passed, resulting in a hefty CGT bill.

Nope as I dont intend for the IP to cross into positive territory. I'll pull every last cent of equity and pay the minimal amount. Method to the madness

 

[alexlee]

Nope as I domt intend for the IP to cross into positive territory. I'll pull every last cent of equity and pay the minimal amount. Method to the madness

How to you intend to keep withdrawing the equity? The asset is owned by the trust. If it refinances the money remains in the trust.

What does 'pay the minimal amount' mean?

 

[Mry]

1. A hybrid trust is a cross between a unit trust and a discretionary (or family) trust which enables an asset to be owned through a trust and still allows the individual to take advantage of the short term negative gearing benefits if the deed is worded properly.

Ever since hybrids were introduced, people have been told that the deed has to be "worded properly" and that every failed PBR and TD coming out of the ATO failed because it wasn't "worded properly". This also came from the top sellers of HDTs who had their own "worded properly" deeds fail. As a result for me as an accountant who gives advice and charges accordingly, theres no way I can offer a hybrid trust to any of my clients and say with surety that it will perform as advertised. In addition, the ATO states in TD 2009/17 that deeds that give benefits to people other than the unitholder will have interest denied or apportioned and many proponents of hybrids have not taken this into account.

2. The hybrid trust effectively converts to a normal discretionary trust when the short term benefits have expired.

And how does it do that? Via a unit redemption triggering a capital gains even on the market value of the property, giving the same tax treatment as if you had sold the property?

3. A hybrid trust allows two different people to use a trust to own businesses or properties using a simple structure rather than a more complicated one. This, in turn, will save money on professional fees such as accountants.

This is probably the first time I have seen a hybrid referred to as a simple structure that will save money on professional fees. If you use a hybrid and you find an accountant that will do that tax work for you, you will be charged a small fortune. If you want a simple structure that will save money on professional fees, I would recommend "sole trader".

4. The hybrid trust could save a substantial amount of money in stamp duty if you choose to transfer the property held within the trust to your own self managed superannuation fund on retirement. [/I]

This is not the feature of a hybrid trust, this is the feature of a unit trust that fulfills certain conditions where the units, not the property, are sold to the super fund such as the property not being held as security for a loan. Some hybrid structures involve having a unit trust with a corporate trustee own the property with a hybrid trust owning the unit that then has the special income units owned by the individual. However, I haven't seen anyone go to that extent yet.

Did a CPA really tell you that stuff?

 

[JIT]

This also came from the top sellers of HDTs who had their own "worded properly" deeds fail.

Mry, who were these sellers and how do you know their deeds have failed?

Thanks.

 

[reeco]

Ever since hybrids were introduced, people have been told that the deed has to be "worded properly" and that every failed PBR and TD coming out of the ATO failed because it wasn't "worded properly".

This is probably the first time I have seen a hybrid referred to as a simple structure that will save money on professional fees. If you use a hybrid and you find an accountant that will do that tax work for you, you will be charged a small fortune. If you want a simple structure that will save money on professional fees, I would recommend "sole trader".

Did a CPA really tell you that stuff?

a cpa confirmed this. Showed her a little book called trust magic. You might want to have a flick through. Actually you've just read a part of it. Those words were word for word from dales book. Dale is well known SS member. I suppose dale can elaborate further if you disagree with a highly regarded book and member.

 

[Mry]

Mry, who were these sellers and how do you know their deeds have failed?

Thanks.

To save you some time waiting, I will not be answering your question.

If I was to say "X Lawyers have hybrid deeds that fail", I will get ugly phone calls and may be sued for libel. Whilst I am sure I would have a good case, I don't want to waste a substantial portion of my time and money in such endeavours. I have been called up in the past on things I've said here.

I know their deeds fail because I get the calls, and I get told which sellers deed was used in a PBR.

Besides, if I was to say "X Lawyers have deeds that fail", people here would get into a circular argument about how their deeds are not "worded properly", which would be amusingly ironic but pointless. Or that the ruling was lodged incorrectly. Or the deed wasn't updated last year to take into account the latest private ruling. Or that the ATO got it wrong and the lazy slackers didn't lodge further objections. There's always another distant hope to grasp onto and we could return to this subject in 10 years time and the same arguments would still be circulating.

There are characteristics of these sellers that observant people will notice.

 

[Mry]

a cpa confirmed this. Showed her a little book called trust magic. You might want to have a flick through. Actually you've just read a part of it. Those words were word for word from dales book. Dale is well known SS member. I suppose dale can elaborate further if you disagree with a highly regarded book

Being a CPA means very little to me, I have CPAs as clients. A CPA once told me that if you move into a house you've rented for 9 years and sell it, it would be capital gains tax free. I don't care who said what or who they are, references to law, cases and rulings are what I respect in tax.

I read the book six years ago and originally found it facinating. PBR 66298 came out and didn't agree with what Dale wrote in the book and there was lot of discussion here about that. I asked about the legislative support for the use of hybrids and was directed to one successful PBR and unsubstantiated stories. There was nothing else.

http://ntaacorporate.com.au/products/faqs/5

I've heard that Hybrid Trusts can provide a lot of tax benefits. Do you provide them?

These types of trusts involve both fixed elements like a unit trust (and may even issue units), but also give the trustee an element of discretion in relation to the distribution of income and/or capital.

Although these types of trusts have their uses, they are often quite specific to the needs of the relevant individuals setting them up, and we do not provide them.

Also, we have found that the "tax benefits" of hybrid trusts are difficult if not impossible to achieve. Refer to the seminar notes on this topic at http://www.ntaa.com.au/media/associationatwork/Usinghybridtrusts.html

Have a read of the article at that link. As I have said many times before, if the NTAA don't sell them and believe that the tax benefits are difficult if not impossible to achieve, that should be enough to satisfy anyone.

 

[reeco]

I read the book six years ago and originally found it facinating. PBR 66298 came out and didn't agree with what Dale wrote in the book and there was lot of discussion here about that. I asked about the legislative support for the use of hybrids and was directed to one successful PBR and unsubstantiated stories. There was nothing else.
.

You may need to read the book again. It's been updated many times since you last read it. My opinion only. I mean the guy literally wrote the book on this subject. Printing words like dale has done, opens himself to litigation if such advice was taken literally. So I'm pretty sure the guy knows what he's talking about.. Are you willing to stick your neck out to confirm all of your statements?

Not always it seems fom the above post to JIT

 

[JIT]

Mry, thanks for your reply, I thought it was worth a shot, but wasn't expecting an answer to this (but fair enough)!

 

[Mry]

I'm not participating in discussions where you want to get insulting.

Here's a thread discussing the issue over 12 pages to save time on recycled arguments.

http://www.somersoft.com/forums/showthread.php?t=34523

And here's a comment that I made on that thread.

"A few times early in my profession I have accepted the verbal advice of other accountants without checking their underlying support for such claims. When they were wrong, I paid the price. Never again. If I am going to discuss or make claims, I back them up with cases, legislation and rulings, and I check anything that I am only 99% sure of. I will not accept any claims unless they come through the proper channels."

 

[alexlee]

When it comes to tax, it's self-reporting with the taxpayer taking personal responsibility.

You really have to ask yourself, do you have enough knowledge / experience of tax to judge someone's ideas? Or is it just because the idea sounds 'good'? I'm deliberately not using the word 'advice' here because you can bet Trust Magic has plenty of legal disclaimers, and so it should.

Do you understand the arguments for and against HDTs to make a genuine, confident decision that what you're doing will pass muster with the ATO, other than 'because this book says so'? Mry and others have considered the pros and cons and decided it's not as black and white as some might state. You may have a different opinion but what is your opinion based on? Having read the rulings and case law around this topic? Or because the book says so and you believe the book?

 

[bene313]

You may need to read the book again. It's been updated many times since you last read it. My opinion only. I mean the guy literally wrote the book on this subject. Printing words like dale has done, opens himself to litigation if such advice was taken literally. So I'm pretty sure the guy knows what he's talking about.. Are you willing to stick your neck out to confirm all of your statements?

Not always it seems fom the above post to JIT

Settle down Reeco. Mry knows his stuff.

This topic has been done to death and the general consensus seems to now be to steer clear of HDTs for property until we have legal clarification.

Dale's book is fairly simplistic and doesn't cover the HDT in much detail. There's far more to consider on the topic of HDTs than what's just in the book.

 

[reeco]

Mry knows his stuff.

I know this well. I've learnt much from mrys words in the past when I was just creeping around He certainly knows more then me. Im merely stating something.
This topic has been done to death and the general consensus seems to now be to steer clear of HDTs for property until we have legal clarification.
Your assessment is to stay clear also terryw?

Dale's book is fairly simplistic and doesn't cover the HDT in much detail. There's far more to consider on the topic of HDTs than what's just in the book.I know mate. It's called going to see a CPA to confirm. Jeeperz I mean what's guy gotta do before he can get firm answers from professionals out there?

Thanks all for the open answers. They've been great. Cheers mry

 

[alexlee]

What makes the confirmation of the CPA you went to see so valuable? What experience do they have with it, have they read the cases, etc? Do you have enough experience / knowledge to determine whether the 'professional' you're going to see actually knows what they're talking about?

Not all CPAs / CAs / Tax Agents are created equal.

 

[Rob G.]

You may need to read the book again. It's been updated many times since you last read it. My opinion only. I mean the guy literally wrote the book on this subject. Printing words like dale has done, opens himself to litigation if such advice was taken literally. So I'm pretty sure the guy knows what he's talking about.. Are you willing to stick your neck out to confirm all of your statements?

Not always it seems fom the above post to JIT

I tend to buy my books from the Taxation Institute, or attend seminars ... often given by a QC.

But then again, information for sale at Angus and Robertson is appropriate as a general introduction for the layperson, but you would not make million dollar investment decisions based on it without further consultaion.

Cheers,

Rob

 

[reeco]

What makes the confirmation of the CPA you went to see so valuable? What experience do they have with it, have they read the cases, etc? Do you have enough experience / knowledge to determine whether the 'professional' you're going to see actually knows what they're talking about?

Not all CPAs / CAs / Tax Agents are created equal.

Are you suggesting it is worthless alexlee? Confirmation from a real estate investing CPA that concurs with dales book is worthless? Silly to think I need to be an accountant to see an accountant dont ya think? Maybe not. . .Next time I see any pro il make sure I'm a pro first in there field. That way I can get yr approval shall I? Ok. I'm not worthy

And yes alexlee I just read some silly book and never sought professional advice. Hah!