Thoughts on HDTs

[Nominees]

I have spent the last few hours getting up to speed again on HDTs and from what I have read there have been a few changes in the last 2 years. I guess they are not really changes if the trust deed was done right in the first place.

As far as I am concerned I have no problems with the HDT distributing income in proportion to each individuals unit holdings.

I also can't see a problem with paying CGT on the redemption of the units as their redemption price should reflect the increase in assets value held by the trust.

This would be no different from an individual purchasing a negatively geared property in their own name and then selling the property a few years later in order to profit from the capital gains.

The good thing with the the HDT is that once all the unit holders have redeemed their units the trust can then distribute income (both rent and capital gains) to any of the beneficiaries at its own discretion.

The only thing I am not 100% sure about is if the unit holders make a capital gain on the redemption of their units, are they still able to claim the 50% CGT deduction if the units were held for more than a year?

What happens from a Trust point of view (I know this may sound silly) but would the trust record a loss, since it sold a unit for $1, 5 years ago and has bought it back at $1.5?

Cheers.

 

[clee]

Much like you I spent some time reacquainting myself with this forum and its views on HDTs. About a year ago I tried to determine how steadfast my Tax position would be if I went with a more aggressive Hybrid Trusts but didn’t really reach any conclusions.

So, after revisiting HDTs on this forum it looks like much of the excitement has dissipated but I still feel that I’m a tad to conservative for it.

I agree with what you’ve said namely.

I also can't see a problem with paying CGT on the redemption of the units as their redemption price should reflect the increase in assets value held by the trust.

This would be no different from an individual purchasing a negatively geared property in their own name and then selling the property a few years later in order to profit from the capital gains.

But I have to ask…… What’s is the difference between between maintaining a HDT and owning it in your own name then selling it to a discretionary trust once it’s positively geared?

Once the asset it positively geared, wouldn’t you pay the same capital gains tax when redeeming the units (because that is done at market value) than you would if you transferred it into a newly setup discretionary trust (which would give you the same control).

If you don’t structure your HDT to include some of the more contentious features (e.g. redeeming units at anything other than market value, allow trustee to override unit holder entitlements, etc) then I am struggling to see the benefit.

Pat highlighted some of the flexibility associated with a trust structure in the thread
http://www.somersoft.com/forums/showthread.php?t=46564&referrerid=0 (e.g. you can crystallise a capital loss when times are tough) but aside from the flexibility afforded by having another entity in play what are the ongoing gains?

I’m not trying to shoot Hybrids down; far from it.

Like Fox Mulder I want to believe and I hope I am missing something….

Also some time ago Chris Batten said that he was on the cusp of reaching some sort of understanding with the ATO on this. I have not been able to find any outcomes on this forum. Can anyone say whether or not he was successful?

 

[Nominees]

Hi Clee,

I agree that there are not many advantages to having a property in a HDT now, except perhaps for asset protection.

Chris Batten seems to favour a HDT, unit trust structure, whereby the unit trust would own the property, and the HDT hold the units. The advantage of this structure would be to move the units to a SMSF without having to pay stamp duty, when you are ready to retire.

 

[StuartW]

But I have to ask…… What’s is the difference between between maintaining a HDT and owning it in your own name then selling it to a discretionary trust once it’s positively geared?

The difference should be stamp duty - i.e. shouldn't be payable if you sell units back to HDT but would be payable if you sell property into a trust.

 

[lizzie]

I agree that there are not many advantages to having a property in a HDT now, except perhaps for asset protection.

the main advantage is that when the portfolio in the trust becomes postively geared, then the units are paid out so that the trust can distribute the income wherever it sees fit.

ie, high income partner able to claim expenses when negative - units paid out - trust converted - low income partner gets positive distribution.

sure the high income partner has to pay cg tax on the increased value - but if held off until a low income year, ie, retirement, then the cg tax rate would be lower (still get 50% discount) and two people earning $50k each pay less tax overall than one person earning $100k

the major problem now is that banks are very very adverse to financing anything held in and hdt because a few cowboys tried to rort the system and hence the ato is looking as the legality of the entire setup.

 

[clee]

Thanks for the quick responses. This is good stuff…..

The difference should be stamp duty - i.e. shouldn't be payable if you sell units back to HDT but would be payable if you sell property into a trust.

I want to take a stab at outlining what you’ve outlined above. Is this what you mean?

Non HDT option
- You buy property (Pay Stamp Duty)
- Once +ve geared you sell to Discretionary Trust (Pay Stamp Duty Again).

HDT Option
- HDT Buys Property (Pay Stamp Duty)
- HDT sells units to you (no Stamp Duty?)
- Once +ve geared HDT buys units back (no Stamp Duty?)

the main advantage is that when the portfolio in the trust becomes postively geared, then the units are paid out so that the trust can distribute the income wherever it sees fit.

ie, high income partner able to claim expenses when negative - units paid out - trust converted - low income partner gets positive distribution.

Wouldn’t you have the same flexibility if the property was in your own name until it’s positively geared at which point you sold it to a Discretionary Trust for distribution to lower income beneficiaries?

sure the high income partner has to pay cg tax on the increased value - but if held off until a low income year, ie, retirement, then the cg tax rate would be lower (still get 50% discount) and two people earning $50k each pay less tax overall than one person earning $100k

Couldn’t you do the same if the property was in your own name (e.g. sell to the Discretionary Trust in a low income year)? I’m also thinking that this would not be too attractive in either case as neither option would enable discretionary distribution until the asset transfer occurred.

I’m a newbie here so please forgive me if I have misinterpreted what either of you have said. I’m putting this stuff up in an attempt to get some of these things straight in my head.....

 

[StuartW]

I want to take a stab at outlining what you’ve outlined above. Is this what you mean?

Non HDT option
- You buy property (Pay Stamp Duty)
- Once +ve geared you sell to Discretionary Trust (Pay Stamp Duty Again).

HDT Option
- HDT Buys Property (Pay Stamp Duty)
- HDT sells units to you (no Stamp Duty?)
- Once +ve geared HDT buys units back (no Stamp Duty?)

Correct. That's the theory.

 

[clee]

Thanks Stuart. Really appreciate the quick and helpful response.