Why I think aspects of the HDT will fail!

Anyone had an audit after property sold?

Mry-
"you pull out Part IVA is a nonsensical manner. What sinks people in Part IVA is if they enter an arrangement purely for tax purposes, there is evidence of such and no other reason (I'm paraphrasing massive sections of tax law here)."

It is not necessary that it be the only purpose the dominant purpose is all that is required for Part IVA to apply. Further, In Spotless' case the question was asked if it was not for the tax benefit would you have entered into the arrangement.

Coastymike,
Have you ever had an audit of a HDT that had sold a property and distributed the gain to the discretionary beneficiaries? Would love to know if anyone has got one past the ATO.

I am not making a comment on the battle going on here and have posted my views (for what they are worth) eariler in this post. My goal here is to turn this discussion around to ask all out there, has anyone got the eventual sale past the ATO?

Thanks for the thread this really interests me. And can anyone tell me how to use the quotes thing?

Julia Hartman
www.bantacs.com.au
 
Last edited:
RE a page back

Ali G,

For the negative gearing to work the high income earner must own the units. Now to try to keep the arrangement clean the units must have some rights. In this thread so far it seems most agree the right is to a future increasing income (depends on the deed). The creditor would get this right and possibly a right to force redemption of the unit so the asset protection is not as good as a DT so still begs the question of dominent purpose.
I was just quoting that the AAT bought in another concept. Is asset protection necessary? If not it may not be the dominant reason.

Julia Hartman
www.bantacs.com.au
 
julia said:
It is not necessary that it be the only purpose the dominant purpose is all that is required for Part IVA to apply
Hmm... I entered into an arrangement with an accountant with the dominant purpose being tax minimisation. So I could get hit with Part IVa just for hiring an accountant?

The mind boggles...

GP
 
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 and examples 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
Hi Dale,

Have you and your colleagues come up with more definitive answers re. the HDT?

Thanks,

GSJ
 
The creditor would get this right and possibly a right to force redemption of the unit so the asset protection is not as good as a DT so still begs the question of dominent purpose.
I was just quoting that the AAT bought in another concept. Is asset protection necessary? If not it may not be the dominant reason.

Julia Hartman
www.bantacs.com.au
So there is really no solid asset protection with a HDT?

GSJ
 
Also, I'm interested in hearing comments on the issue of the unit holder giving up a portion of the future capital gains.

One can use the same argument of putting a property into a trust: the individual loses ALL claims to future income and CG, but putting an asset into a trust is a legally tried and true method.

On the deductibility side, one can argue that putting the property into a HDT gives rise to the same deductions (interest) as if the individual had bought the property in their own name.

Therefore, the only tax benefit gained by putting it into the HDT is that future CG and income can be streamed (since assuming no further issuance of units the proportion of trust income that the unitholder can claim decreases as the market value of assets increases). However, this 'steaming' benefit is exactly what happens with a discretionary trust, which the ATO doesn't dispute.

I realise that's the whole point of the HDT, but will the ATO simply combine it's views on individual negative gearing (ATO allows it, and using a HDT arguably gives you the same deductions as individual ownership) and putting assets into trusts (ATO does not dispute the streaming effect which DOES lower tax).

I mean, if I put an IP into a Family Trust, carry forward all losses until it becomes positive and when I sell it distribute CG at my discretion, the ATO wouldn't care. i.e. the ATO allows use of an entity results in income streaming. Prima facie, then, it would seem that the HDT issue lies in the fact that the individual get to deduct interest while getting the benefit of income streaming. However, such a deduction would have been allowed had the IP been in the individual's name.

i.e. putting an IP into a HDT does not create more deductions where none would have existed without the structure.

Without actual case law, the logic of a HDT works (i.e. there is an argument for it). The question is how the ATO and the courts would actually rule on it if a case came up.
Alex
 
Without actual case law, the logic of a HDT works (i.e. there is an argument for it). The question is how the ATO and the courts would actually rule on it if a case came up.
Alex
Alex, it is a big mistake to think that because individual elements which have proved OK in different structures and situations, they can be combined in a new structure and be OK. History shows that is not the case.
 
Great Pig - Well this is the otherside of the line. The ATO says it is ok to take advanage of concessions offered by the law (some would say that is what a HDT does) and normal family or business arrangements.

GSJ - Possibly, this depends on the rights given to the units by the deed. But the less rights in the units the more ammunition to the ATO as far as the investment having a dominant purposes of a tax benefit.

And still no one has told me how to use the quotes. Help please not good at that sort of stuff.

Julia
www.bantacs.com.au
 
Alex, it is a big mistake to think that because individual elements which have proved OK in different structures and situations, they can be combined in a new structure and be OK. History shows that is not the case.
I agree. All you can say is that you have a basis for arguing it in court, but how the ATO or the courts respond is anybody's guess. Though I assume in the absence of specific case law lawyers and accountants who are advising clients to use HDTs are using arguments based on accepted legal principles such as income streaming.

A few of the big firms (KPMG in particular, I believe) are getting sued in the US over agressive tax shelters, even though at the time they must have received legal opinions stating that 'they believe' it will past muster with the IRS.

The laws, of course, are deliberately vague. Explicit laws are easier to work around, and vague laws gives the courts and the ATO more ability to interpret them to close loopholes if they want, precisely because new entities and schemes appear.
Alex
 
Last edited:
So there is really no solid asset protection with a HDT?

GSJ
Isn't individual assets limited to the value of the trust units? e.g. if you start with a $200k trust, with $200k worth of units, and in 10 years the trust assets are worth $400k, then even if the individual gets sued the creditors would only get a max of $200k from the trust assets.
 
And still no one has told me how to use the quotes. Help please not good at that sort of stuff.
Hi Julia,

I don't know how to use the new Multiquote....but for quoting just one post, simply press the "quote" button at the bottom of the post...

alternatively you can copy and paste, and add [ quote] (with no spaces) at the beginning of the paste and [/ quote] (again with no spaces) at the end of the paste.

hope this makes sense
 
Testing

alternatively you can copy and paste, and add [ quote] (with no spaces) at the beginning of the paste and [/ quote] (again with no spaces) at the end of the paste.
Thanks Joannak,
This is a test run. It was the quoting part of a post that I couldn't work out so hopefully this works.

Julia
www.bantacs.com.au
 
It is not necessary that it be the only purpose the dominant purpose is all that is required for Part IVA to apply. Further, In Spotless' case the question was asked if it was not for the tax benefit would you have entered into the arrangement.
The legislation says sole or dominant purpose, which to me means either the only reason, or the pre-eminent reason after all others have been considered and I couldn't find any other reason that explained the action as well as for tax advantages, so I discarded them. Perhaps I wasn't clear enough in that answer but I like to keep things short.

Thanks for the thread this really interests me. And can anyone tell me how to use the quotes thing?
[ QUOTE ] text here [/ QUOTE ]
remove the spaces in the square brackets and that will work.

So there is really no solid asset protection with a HDT?
Depends on what happens in court, but for a standard HDT a special income unit holder may request the redemption of the units but the Trustee has the power to accept that request either in part or in full. From my reading of the deed a creditor would have to get a judge to force the trustee to contravene the deed's instructions for this to happen. That would be like a judge demanding someone break the law, which is unlikely.

Then again, I am not a lawyer so I don't know what would happen in court.
 
Last edited:
Julia,

Are you able to elaborate on what you mean by the conservative version of a HDT?

How would you value SIU's if they are redeemed (if the SIU money was used to buy an IP, that is negatively geared for the SIU holder)?

What is the NTAA thing you refer to - is there a website/link so I can read what they said about the HDT?

GSJ

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
 
Last edited:
Have a read of TR95/33

GSJ,
By conservative I mean that the units are redeemed well before any distributions are made to the discretionary beneficiaries. The NTAA are a professional body for accountants that is a bit more agressive than most. Their web site is www.ntaa.com.au. Anyone can be a member and the membership entitles you to ask questions over the phone so they would be able to give you more info that way. I do not personally get involved in Hybrid trusts if a client really wants to set one up I prefer to send them to a specialist but as I said I can normally find a better way. As a result I cannot help you much on the nitty gritty, it is not my area of expertise.
I think TR95/33 is worth reading and applying to the arguments for HDTs. Here are a couple of quotes from it:

30. In such cases their Honours said that the disproportion between the detriment of the outgoing and the benefit of the income may give rise to the need to resolve the problem of characterisation by a commonsense or practical weighing of all the circumstances, including the direct and indirect objectives and advantages, which the taxpayer sought in making the outgoing. If, after weighing all the circumstances, it can be concluded that the whole outgoing is properly to be characterised as genuinely, and not colourably, incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of subsection 51(1) unless the outgoing satisfies the exclusory provisions (or negative tests) within the subsection.
31. Their Honours then said (at 91 ATC 4958; 22 ATR 623):
'If, however, that consideration reveals that the disproportion between outgoing and relevant assessable income is essentially to be explained by reference to the independent pursuit of some other objective and that part only of the outgoing can be characterised by reference to the actual or expected production of assessable income, apportionment of the outgoing between the pursuit of assessable income and the pursuit of that other objective will be necessary.'
32. In Fletcher's case the assessable income derived from the annuity in each of the tax years was less than one-eighth of the relevant amount of interest outgoings in that year. The High Court accepted the Commissioner's position that the deduction for interest outgoings should be allowed to the extent of the assessable income received from the annuity investment plan. The Court took the view that 'the outgoing in excess of the income received' could not necessarily be characterised as falling within the first limb of subsection 51(1).
33. At 91 ATC 4959; 22 ATR 624, they said:
'Beyond that point, the mere relationship between outgoings actually incurred and the much smaller amounts of assessable income actually derived does not suffice, without more, to answer the question whether, and if so to what extent, the adjusted outgoings of interest are properly to be characterised as incurred in gaining or producing assessable income. That question must be answered by reference to a common-sense appreciation of the overall factual context in which the outgoings were incurred. It necessarily involves a consideration of the contents and implications of the overall contractual arrangements to which the partnership became a party ... it also encompasses a consideration of the purpose which the members of the partnership, and those who advised them or acted on their behalf, had in view in incurring the outgoings.'
34. Whilst the Court indicated that the whole structure of the investment plan seemed to be predicated on an assumption that the various agreements would be effectively terminated at some time before the commencement of the last five years of the plan, it remitted the matter to the Administrative Appeals Tribunal ('AAT') to determine the intention of the parties. The AAT found that the taxpayers had not intended to remain in the scheme for the full 15 years ( Fletcher & Ors v. FC of T 92 ATC 2045; AAT Case 5489A (1992) 23 ATR 1068).
Application of these principles
35. Although the decision in Fletcher was made in the context of an artificial tax avoidance scheme, we can see no basis for limiting it in this way. We think the approach applies generally to all cases involving the application of the first limb of subsection 51(1), albeit that its application is more likely to have an impact in the context of a tax avoidance scheme.


Example 1
47. Mr Chancer receives a prospectus inviting participation as an investor in a cattle breeding scheme. The scheme promoters arrange for each investor to borrow $100,000 for the right to participate in the scheme. The interest is payable over the life of the scheme and is financed by a 'round robin' of cheques. Under the scheme, substantial losses are to arise for investors in the first 5 years, small losses in the next 6 years and large net incomes over the final 5 years.
48. Over the 16 year agreement the total of the anticipated assessable income is expected to exceed the total outgoings of interest. However, every investor has the option of terminating his or her participation before the large net incomes arise without incurring personal liability on any outstanding borrowings.
49. Mr Chancer derives considerable assessable income from other sources and considers the investment to be excellent in view of the tax deductions offered by the promoters.
50. A commonsense weighing of all the relevant evidence indicates that the scheme is not expected to run its full course and Mr Chancer's dominant purpose in entering the scheme is to incur the outgoings in order to minimise his tax liability. In the circumstances, as the total anticipated allowable deductions will far exceed the total assessable income reasonably expected to be derived until the time of termination, the excess of the outgoings over the assessable income will not be deductible under subsection 51(1).
Example 2
51. If the arrangement outlined in Example 1 provides Mr Chancer with no opportunity of leaving the scheme until its termination, the interest payments will be fully deductible under subsection 51(1). This is so because, over the 16 year life of the agreement, the total of the anticipated assessable income is expected to exceed the total outgoings of interest


Julia
www.bantacs.com.au
 
Thanks Julia,

I will read this in detail and look at the NTAA site and consider joining, and see what I can make of it...

Regarding TR95/33, I interpret from this (could be totally wrong):

- If income is far less than the interest expense, then part of the interest expense may not be tax deductible.

- it is better for all income to go to the SIU holder, and avoid apportioning income, while SIU's are on issue.

- however, if over the long-term, the income is expected to be much greater than the interest expense, then the whole interest expense may still be fully tax deductible.

And:

- if the SIU holder has an opportunity to terminate or exit the investment before it reaches its full course, then none of the interest may be tax deductible, as income may still be much less than the interest expense at this point in time.

Regarding the last point, in relation to SIU's for IP's, I suspect that the key again here is that if the SIU holder exits the investment, their units should redeemed at an appropriate 'market value' and all the money from the sale goes to them, in order to make the interest expenses incurred fully deductible.

Furthermore, the idea of altering or creating a trust deed to give the SIU holder a specific investment time frame eg, 30 years during which if they exit the plan they get their SIU's only at cost price, rather than market value (to avoid differing interpretations of what market value is, see thread 'Why don't big firms sell HDT's), seems to fall over based on this ruling/legislation - particularly if it can be shown that the SIU holder has no intention of holding the investment beyond the 30 years, and this may potentially make all the interest expense not tax deductible???

GSJ
 
Last edited:
GSJ,

That's right, at worst no negative gearing for the whole time of the investment plus penalties.
So the question is are HDTs worth the risk when there are usually other ways of achieving the same end and they are cheaper.
I'm am not saying HDTs "will fail". I really don't know for sure. It is the uncertainty that I am pointing out, that is why any clients who are determined to use them I send to a specialist.

Julia
www.bantacs.com.au
 
  • Like
Reactions: JIT
GSJ,

That's right, at worst no negative gearing for the whole time of the investment plus penalties.
So the question is are HDTs worth the risk when there are usually other ways of achieving the same end and they are cheaper.
I'm am not saying HDTs "will fail". I really don't know for sure. It is the uncertainty that I am pointing out, that is why any clients who are determined to use them I send to a specialist.

Julia
www.bantacs.com.au
Julia, when you say 'other ways that achieve the same thing and they are cheaper', what are you referring to?
Alex
 
Alternatives...

...usually other ways of achieving the same end and they are cheaper.
www.bantacs.com.au
Hi Julia,

I am also interested in what you mean by this. I know you mentioned salary sacrificing interest payments before, but if you are referring to investment loan interest, then this is tax deductible anyway - and also, isn't doing this similar to using a 221D/ITWV?

The only other options I can think of are using a DT (but losses are retained), or purchase in a low-risk spouses name (for asset protection) - but if they are also the lower-income earner there is less tax advantage to this.

Also, just curious, with 'tenants in common', can you change the ownership split without creating CGT/stamp duty consequences. This way if the high-income earner has a higher ownership, eg 80%, and then loses their job, can you make the other person have say 99% ownership now, so at least the other owner can negative gear more? - otherwise that high-income earner's negative gearing losses have to be retained until they find a job/start earning an income again?

GSJ
 
Top