sorry, not sure on posting a link so I've copied an article from LawCentral.com.au
Hybrid Trusts - Where are we now? Where are we going?
Last year I discussed the advantages of negative gearing within a Hybrid Trust and the 'new' approach of the ATO when dealing with this.
Hybrid Trusts, as the name suggests, are a combination of a Discretionary Trust and a Unit Trust. Unit holders are entitled to fixed income and/ or capital. However, there is still a lot of flexibility for the Trustee to deal with the income and capital of the Trust.
You may recall the ATO had various concerns with the 'normal' Hybrid Trust. The ATO issued various Private Binding Rulings which we were able to get our hands on - such as PR 66594 and PR 71023.
The issues of the ATO were:
The Trustee has discretion to who and how much income is distributed;
The Trustee can decide not to distribute income at all;
The Trustee has total discretion in relation to the distribution of Capital gain; and
Units can be redeemed for the issue price, with no consequences for the taxpayer.
The ATO is probably wrong. However, without discussing the merits of the ATO opinion, the problem is that the ATO is quite often the arbitrator. You really do not like to mess with the arbitrator. If they get upset, they make you go to court, or worse still, keep auditing you for the rest of your life every year.
I have had various clients who would like to set up a Hybrid Trust, but also wanted certainty in relation to the structure used.
In consultation with the client, a Hybrid Trust was drafted that dealt with the ATO concerns and took into account the specifics of the client.
The Trust deed was drafted in such a way that:
The Trustee has to distribute income to unit holders;
The Trust deed didn't allow income to accumulate;
If there is a Capital gain, this has to be distributed to the Income Unit Holders; and finally
Units must to be repurchased for the market value, not the issue price.
The client then lodged a private ruling application in August 2007 and hoped that a swift and satisfying answer could be received by the ATO.
My client received the acknowledgment letter from the ATO. In that letter, he was strangely informed that if he wished, he could withdraw his application. Why would you lodge an application to withdraw a ruling the next day?
The client was informed a month later in a second letter that, "The Commissioner currently has no formal position on the tax consequences of investing in a discretionary Hybrid Trust". How does this fit in with the various private rulings?
My client was also informed that the Commissioner was working on the development of such a view. However, the variety of Hybrid Trusts and the complexity of the issue meant this needed time.
Then, at the end of 2007, my client received another email indicating that the ATO was still working on the issue and there should be some progress in early 2008.
So, where does this leave us?
We can do nothing and just buy property in our own names
I believe this is not the best approach taking into account a more litigious society. Tenants sue you. Further, State Governments are increasing Land Tax on a progressive scale.
We can wait until we receive the new opinion by the ATO regarding how they intend to deal with Hybrid Trusts. However, that could take another year. With the stock exchange taking a hit, property prices may go through the roof.
We can be pro-active. Advance tax planning and a well drafted Hybrid Trust deed which addresses the ATO concerns, should withstand any ATO scrutiny and give an investor the flexibility and peace of mind he deserves.
Thomas Henn, Brett Davies Lawyers