Why I think aspects of the HDT will fail!

Hi Bort

Yes, the trust can borrow money against its assets (one IP or many IP's) and redeem the units from the SIU holder. The trust can then claim the interest on the loan used to do this. The redemption price must be, in accordance with the trust deed rules, at least as much as was paid for the units.

Therefore, if the units were bought for $1 each they must be redeemed for at least $1 each.

You are correct, the trust has not disposed of the property and so the trust does not have a CGT event.

Have fun
Dale



bort said:
can the HDT then borrow a further $500k against the property (assuming an appropriate bank valuation etc) and pay out the unit holder MrX for their initial $500k worth of units purchased?

Given their has been no CGT event on the property at that point in time, does that mean no capital gain needs to be distributed (I assume this is the case) - or would you need to revalue the units based on the increased value of the property and pay out $1m for the 500k units to MrX? (oh and would this be the same for shares which have a ready market valuation?)

If you did not have to revalue the units, and paid MrX $500k, and then later on when the HDT did sell the property, the CG could be distributed to any beneficiary? or would it still be restricted to the prior unit holder MrX?
 
Hi Dale,

DaleGG said:
A capital gain is defined as part of the income of the trust and therefore if the trust has issued SIU's then that CG will also be distributed to the unit holders as part of the overall trust income.
I'm checking on this with my trust accountant (NickM), as if this is true it's of some consequence to me.

In the meantime I've been doing some research myself and have a document from Kevin Monro (although written by a Greg Vale) called "Trusts in Structuring". In the section on hybrid trusts it gives an example of how only the attributable portion of trust income has to go to the unit holder, and then states:

The remaining balance of the net taxable income would then flow to the discretionary beneficiaries in the same way as a normal discretionary trust. Further, the taxable capital gains and non-taxable capital gains would flow to the discretionary beneficiaries and not to the unitholders
This document is from 2002, but has it changed since then (assuming it was correct at the time)?

Thanks.

Cheers,
GP
 
GreatPig said:
Hi Dale,


I'm checking on this with my trust accountant (NickM), as if this is true it's of some consequence to me.

In the meantime I've been doing some research myself and have a document from Kevin Monro (although written by a Greg Vale) called "Trusts in Structuring". In the section on hybrid trusts it gives an example of how only the attributable portion of trust income has to go to the unit holder, and then states:


This document is from 2002, but has it changed since then (assuming it was correct at the time)?

Thanks.

Cheers,
GP

Greatpig I await you next postkeenly, but can I add a variation to this post.

If I buy units in a trust this allows me certain interest tax deductions far superior to my wife who has no income. Since I am alreasdy in the top tax bracket.

15 years later I sell the units back to the Trust at the purchase price.
My wife then buys the units at the same purchase price.
The IP in the HDT is then sold.
Her taxes are much lower than mine would be, if I had been given the capital gains.
Is this example flawed or ok?
 
ggumpshots said:
15 years later I sell the units back to the Trust at the purchase price.
My wife then buys the units at the same purchase price.
The IP in the HDT is then sold.
Her taxes are much lower than mine would be, if I had been given the capital gains.
Is this example flawed or ok?
Irrespective of the answer to my question, as long as you redeemed all the units before selling the IP, so that there were none on issue, then the CG should be able to be distributed discretionally anyway.

The main issue I can see in that case is how the trust would fund the unit redemption before selling the IP.

Cheers,
GP
 
GreatPig said:
Irrespective of the answer to my question, as long as you redeemed all the units before selling the IP, so that there were none on issue, then the CG should be able to be distributed discretionally anyway.

The main issue I can see in that case is how the trust would fund the unit redemption before selling the IP.

Cheers,
GP
I guess the units are redeemed but payment would be deferred.
As in Business debts can be outstanding.
 
HI GP

Excellent!

Yes, I have a copy of that same article. Quite an interesting read.

NickM, Coasty Mike, Mry and myself have been comparing our thoughts, processes and understanding of exactly how a HDT works over the last week or so. We have asked both Chris Balalovski of Macquarie Group Services, from whom we get our trust deeds and Chris Batten to clarify and fine tune issues for us.

Hopefully it is not too long before we have more definitive answers as to how the HDT works.....as opposed to how other trusts (such as the PIT) works.

I am also aware that MGS is about to release training video's that should cover a lot of this stuff and provide more complete answers, reasoning andexamples on how to use the HDT properly and within the law.

After all, that is what we all want...even our friend Ronin.

Have fun
Dale

GreatPig said:
Hi Dale,

I'm checking on this with my trust accountant (NickM), as if this is true it's of some consequence to me.

In the meantime I've been doing some research myself and have a document from Kevin Monro (although written by a Greg Vale) called "Trusts in Structuring". In the section on hybrid trusts it gives an example of how only the attributable portion of trust income has to go to the unit holder, and then states:

Thanks.

Cheers,
GP
 
Thanks, Dale.

Ultimately I hope it (still) works as Greg Vale noted, as that was my understanding when I set up my investment structure, and it was designed around that principle to some extent.

Cheers,
GP
 
I have read this thread with great interest.

Has there been any update to this discussion in relation to the Munro/Vale document?

Thanks
joey
 
HDT reluctantly

Due to the NTAA supporting the concept of Hybrid discretionary trust we have faith in a concervative version of the concept but we have yet to find a situation where we cannot apply a more proven method of tax minimisation. Shop around see what the doubters have to offer in other ways. For example the idea of salary sacrificing all the cash flow rental property expenses in the high income earners package. This has the backing of case law dating back 13 years.

Julia Hartman
visit us at bantacs.com.au
 
Due ...............
................For example the idea of salary sacrificing all the cash flow rental property expense s in the high income earners package. This has the backing of case law dating back 13 years.

Julia Hartman

visit us at bantacs.com.au

What is Cash flow rental expnses............doesnt seem like english.
Rental expenses are not salary.
How can you salary sacrifice cash flow rental property expenss ?
Can you elaborate what you mean by an example
 
Hi

Julia is referring to the costs that you pay in relation to your IP. That is, the interest, council rates, insurance etc.

If your employer reduces your salary to take pay for these costs as a salary sacrifice arrangement then you pay less tax during the year.

Your employer gets to claim the costs as a tax deduction and does not have to worry about Fringe Benefits Tax (FBT) because of the "otherwise deductible rule" that says that you (or an associate of you) would get to claim the costs as a tax deduction anyway.

Does this help?

Dale

What is Cash flow rental expnses............doesnt seem like english.
Rental expenses are not salary.
How can you salary sacrifice cash flow rental property expenss ?
Can you elaborate what you mean by an example
 
Hi

Julia is referring to the costs that you pay in relation to your IP. That is, the interest, council rates, insurance etc.

If your employer reduces your salary to take pay for these costs as a salary sacrifice arrangement then you pay less tax during the year.

Your employer gets to claim the costs as a tax deduction and does not have to worry about Fringe Benefits Tax (FBT) because of the "otherwise deductible rule" that says that you (or an associate of you) would get to claim the costs as a tax deduction anyway.

Dale, in this case am I right in saying that the employee also 'saves' on not having to pay mandatory super on the salary sacrificed portion? And the employer gets to save on FBT, payroll taxes, etc (it would be as if the employer paid the employee less in total)?
Alex
 
Salary Sacrificing Rental Property expenses

Payroll varies from state to state but yes the employer would not have to pay superannuation on the portion of the package sacrificed so this should be part of the negotiations.

Julia Hartman
www.bantacs.com.au
 
Hey Julia

LOVE some of the information on your site and BEST part is its generally simple enough for me to understand ;)
 
Due to the NTAA supporting the concept of Hybrid discretionary trust we have faith in a concervative version of the concept but we have yet to find a situation where we cannot apply a more proven method of tax minimisation.
Hi Julia

Appreciate your BANTACS site as well. Just wondering though does the NTAA conservative version exclude putting your PPOR in the HDT and renting? Also at the risk of going around in circles haven't most of the posts on this thread supported HDTs from the angle of asset protection not tax minimisation?

For example the idea of salary sacrificing all the cash flow rental property expenses in the high income earners package.
Unfortunately as a Qld Govt employee (non-health) I think I'm deprived of this particular idea.:(

Cheers

Tattler
 
HDT & Your Own Home

In Tabone v FCT 2006 ATC 2211 the AAT found that the primary purpose of the borrowing was to provide a residence so the interest was not tax deductible to the trust. They also said Part IVA applied
The case was intended to decide whether you could negatively gear your own home through a HDT but other interesting points the AAT made were:
1) The purpose was not asset protection because the taxpayers were employees so little chance of being sued and as they owned the units in the HDT the property would be available to creditors anyway
2) They doubted whether the units would ever produce any income in the future so the arrangment lacked a nexus to cost of earning income.

Julia
www.bantacs.com.au
 
1) The purpose was not asset protection because the taxpayers were employees so little chance of being sued and as they owned the units in the HDT the property would be available to creditors anyway

Is this to say that in order for a trust to provide asset protection, the 'high risk' person can be the director but someone else must own the units? That is, there is no asset protection benefit in having a trust if you are both the director and owner of the units, and also a high risk individual? Is this only with HDTs or with all trusts? If someone does not have a spouse to own the units instead of them, what do they do they do to protect their assets?

I hope my newbie questions are not too off topic... just trying to digest everything. Thanks. :eek:
 
julia said:
2) They doubted whether the units would ever produce any income in the future so the arrangment lacked a nexus to cost of earning income.
Wouldn't the rent paid to live in the house have generated income back to the unitholders?

GP
 
Imagine an annuity where you get paid 3% for the first year, and then the income increases by 7% a year for life.

You borrow to buy such an annuity. I think that would satisfy the income test, even though you never get capital gains.

An IP's rent pretty much tracks the value of the property, with some variation. So what I'm 'buying' with the income unit is income for life indexed at above inflation.

I also note that the concept of 'deriving a tax benefit' doesn't specify whether the tax benefit has to be immediate or not. Therefore, applying that to its logical conclusion, using a simple family trust to hold shares would be an issue because the tax benefit of lower capital gains is achieved. Yet the ATO allows this in FTs.
Alex
 
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