Almost understood...
Hi,
Just re-read those private rulings a couple of times.
So, referring to Alex's question to Dale above, if you do have a trust deed that allows this - ie, meaning that the unitholder does NOT have a 'present or fixed entitlement to the trust income', then in this instance, where the SIU person is negatively gearing, with no guaranteed entitlement to future income, you need to show the ATO how this is 'commercially viable'. ie, what's the point of the SIU person negatively gearing if they don't have any definite income/capital growth/gains prospects in the future? So, this is something that the ATO would look closely at. If the income is disproportionately low compared to the interest expense, not all of the interest expense may be tax deductible, hence 'apportioning of the interest expense' may be required here. If you then argue, that there are other reasons for this setup, such as 'asset protection', then this may not work, as this may be classed as a 'private use', so the interest expense is NOT fully incurred in earning an income, and so the amount tax deductible may be decreased accordingly. If this is the case, however, I don't see the point of having a trust deed with this wording - ie. you are reducing the income to the SIU person, and in doing so, reduce the tax deductible interest expense - so, net effect = NIL?.
Dale - so, I think I am getting closer to understanding what you were saying before with this reply to Alex's post quoted above?!
To make things simpler/safer though, as you and others have mentioned, it's probably better to just give ALL income to the unitholder! ie, the 'conservative' interpretation of the use of the HDT.
So this would mean having a trust deed that specifically entitles the unitholder to a 'present or fixed entitlement to the trust income', or, if it doesn't, just give the unitholder ALL the income anyway to be safe.
This is all of course, while SIU's are on issue, once they are redeemed, at a 'market value', then the HDT can regain it's ordinary discretionary powers.
Is this understanding correct???
Thanks for the clarification.
GSJ
Hi Alex
Yes, that makes good sense and is our basic understanding, too.
However, we are also aware that differing trust deeds will have differing rules for profit distribution.
Dale
Originally Posted by alexlee
Hi, Dale,
My understanding of the reading of the docs is that the income units entitles the unit holder to income proportional to value of units / market value of assets? Is this correct? i.e. as trust assets grow the portion of income the unitholder is entitled to decreases, though the income of the trust increases?
Alex
Hi,
Just re-read those private rulings a couple of times.
So, referring to Alex's question to Dale above, if you do have a trust deed that allows this - ie, meaning that the unitholder does NOT have a 'present or fixed entitlement to the trust income', then in this instance, where the SIU person is negatively gearing, with no guaranteed entitlement to future income, you need to show the ATO how this is 'commercially viable'. ie, what's the point of the SIU person negatively gearing if they don't have any definite income/capital growth/gains prospects in the future? So, this is something that the ATO would look closely at. If the income is disproportionately low compared to the interest expense, not all of the interest expense may be tax deductible, hence 'apportioning of the interest expense' may be required here. If you then argue, that there are other reasons for this setup, such as 'asset protection', then this may not work, as this may be classed as a 'private use', so the interest expense is NOT fully incurred in earning an income, and so the amount tax deductible may be decreased accordingly. If this is the case, however, I don't see the point of having a trust deed with this wording - ie. you are reducing the income to the SIU person, and in doing so, reduce the tax deductible interest expense - so, net effect = NIL?.
Dale - so, I think I am getting closer to understanding what you were saying before with this reply to Alex's post quoted above?!
To make things simpler/safer though, as you and others have mentioned, it's probably better to just give ALL income to the unitholder! ie, the 'conservative' interpretation of the use of the HDT.
So this would mean having a trust deed that specifically entitles the unitholder to a 'present or fixed entitlement to the trust income', or, if it doesn't, just give the unitholder ALL the income anyway to be safe.
This is all of course, while SIU's are on issue, once they are redeemed, at a 'market value', then the HDT can regain it's ordinary discretionary powers.
Is this understanding correct???
Thanks for the clarification.
GSJ
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