Trusts

Hi All,

I have a discrectionary trust and I believe that it can not be used to take advantage of negative gearing but a hybrid trust can.

Can anyone explain the difference and if the discretionary trust can be converted to hybrid if needed?

Thanks in advance.

Bazza
 
Originally posted by Bazza
Hi All,

I have a discrectionary trust and I believe that it can not be used to take advantage of negative gearing but a hybrid trust can.

Can anyone explain the difference and if the discretionary trust can be converted to hybrid if needed?

Thanks in advance.

Bazza

Hi Bazza

In a nutshell, the difference is that a hybrid trust combines the characteristics of a discretionary trust and a unit trust. As you've got a discretionary trust, I'll assume you understand how they work.

What a hybrid trust permits you to do is have the trustee issue units which have certain rights attaching to them to do with the trust property and the trust income.

The usual practice is for units to be issued which have the right to receive all or most of the trust's income. A person will borrow against other assets they own (eg a Line of credit against properties held in their own name) to buy these income units.

The net result is:

1) the trust is cashed up with the proceeds of the loan which it can use as deposits to buy additional properties (financing the balance with loans in its own name and secured by the property being acquired)

2) the person who bought the income units is entitled to receive the income from the trust in accordance with the terms on which the units were issued.

3) as the person borrowed to buy an income producing asset (namely the units) they can claim the interest on their borrowing as an allowable deduction against their income (whatever source)

in essence you can kind of get the best of both worlds - some asset protection as well income and capital streaming flexibility via the discretionary element and the ability to "negative gear" the interest on borrowings against your PAYG income etc.

can a discretionary trust be converted to a hybrid? YES

BUT you need to be VERY VERY careful that there is no resettlement of the trust as this could have expensive stamp duty implications.:eek:

As always, get legal and accounting advice on your specific situation.

Good luck
N.
 
Hi Nigel,

Thanks for the clarification.

I guess if an individual buys the income units then the profits can't be transferred to others in order to take advantage of tax deductions if incomes changes in the future though?

Cheers,

Bazza
 
With regards to trusts, I'm a little confused.

With a hybrid discretionary trust, how exactly are interest deductions passed onto the beneficiaries?

I'm currently examining the options for buying investment properties. I have good equity and of cashflow, so the finance won't be a problem, but I need to take advantage of the tax deduction on the loan interest for maximum benefit to my overall cashflow.

I'm unattached and am looking at setting up a trust to hold the properties in so that I have maximum flexibility in the future, should I get married and have children.

My searches so far have indicated that hybrid discretionary trusts are the way to go, but I don't understand exactly how they work, and whether they will suit my needs.

I understand that capital gains and any net earnings need to be distributed each year, which is fine, but I'm unsure how the tax deductions would be handled. The other option is to buy the properties in my own name, where the deductions will offset my current tax liability, which is what I will do, if I can't pass the deductions from a property held in trust through to my personal tax liability.

Can anyone explain this to me, or direct me to a link that explains it to me in more detail. I've checked out the Chris Batten site, but the details there were pretty thin on the ground.

Regards

The Puppeteer
 
Originally posted by Bazza

I guess if an individual buys the income units then the profits can't be transferred to others in order to take advantage of tax deductions if incomes changes in the future though?


Bazza,

In my unprofessional opinion, I beleive that's correct, but my understanding is that once your property portfolio starts producing a positive cashflow (profit) then you would revert the trust to a discretionary trust (ie sell back the units) allowing you to distribute the profits as you would through a normal discretionary trust.

Dale, any comments?

Regards,
Paul
 
Originally posted by Puppeteer


With a hybrid discretionary trust, how exactly are interest deductions passed onto the beneficiaries?

...I need to take advantage of the tax deduction on the loan interest for maximum benefit to my overall cashflow.

I'm unattached and am looking at setting up a trust to hold the properties in so that I have maximum flexibility in the future, should I get married and have children.

My searches so far have indicated that hybrid discretionary trusts are the way to go, but I don't understand exactly how they work, and whether they will suit my needs.

...I'm unsure how the tax deductions would be handled.

Can anyone explain this to me, or direct me to a link that explains it to me in more detail. I've checked out the Chris Batten site, but the details there were pretty thin on the ground.


Puppeteer,

Get hold of Dale G's book 'Trust Magic'. I can highly recommend it. It should help answer most, if not all, of your questions.

I'm not associated with Dale and aren't trying to actively market his book, but I bought the book when it first came out and it really helped me understand things a lot better.

Regards,
Paul
 
Thanks for the reference. I'll be sure to check it out.

Could you tell me how "up-to-date" Trust Magic is? Does it cover the recent changes in laws concerning trust structures?

Cheers
 
Hi Puppeteer

I agree that Dale's book is a good point of reference.

I also have some free downloads available on my website along with some further explanations on the advantages and disadvantages of various structures.

This includes discretionary and hybrid trusts

NickM
 
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