Why I think aspects of the HDT will fail!

I have just subscribed to this forum after reading some very interesting threads and posts. There are certainly many knowledgeable people out there.

I was on the verge of setting up a HDT and have decided against it for reasons which will follow below. The threads dealing with this clearly suggest much angst and uncertainty. The re-assurance is not convincing because it almost always comes from a small group of promoters who obviously swear by the concept. In reality, the HDT structure is NOT unknown to the vast army of lawyers and accountantrs out there. I've spoken to accountants from some of the city's top firms and they've given short shrift to the concept. Many highly skilled practitioners are aware of the structure yet choose to avoid it. How is it in a country which has lawyers and accountants numbering more than 30,000, that you would be hard pressed to find more than a dozen sold on the idea? I read somewhere that a particular firm does 50 such structures a month. Well, that alone equates to over $1 million of recurring revenue EVERY YEAR... Food for thought, but I won't digress :)

Ignoring the asset protection issue in this post (I believe the UT part negates the asset protection anyway), the HDT concept would clearly satisfy the ATO definition of a 'scheme' in relation to Part IVA. Why? Well, the investor has a hand in all aspects of the structure and his/her dealings with the UT and/or HDT are certainly not at arms length. Nobody on this forum would argue in fact that this is not a contrived arrangement. In an example where property is purchased for say 500k, the investor acquires units entitling him/her to all the income relative to the 500k property ie. ALL the trusts assets at the time. Now the often touted advantage of the HDT is that all the income (less trust expenses) can be streamed to the unit holder, thereby allowing him/her to negatively gear. In this example assume the investor incurs 35k interest and receives 16k pa in income, allowing a healthy tax break. The ATO, lining up its ammunition, would point out that even if the investor enjoyed rental increases averaging 5% pa, it would take over 22 years for the 'investment' to break even... Mmm, the court would wonder (using the reasonable man test), was that commercially viable or tax driven?

It is then said that when the investor wants to sell the property, the income units are first redeemed (at potentially $1 per unit (!)) and the Trustee may then allocate the ensuing capital gain to the lowest tax beneficiary. This achieves Nirvana for property investors - the highest income earners gets all the tax breaks and the lowest income earner enjoys the capital gain. WELL REALLY! A court will almost certainly examine (in the context of the 'scheme') the acquisition of the units i.e 500k purchased units worth 500k. With the corresponding rental increases, the value of those units would have to increase accordingly, arguably in line with the value of the property. How, the court would want to know, could 500k be effectively paid for units in a trust whose sole asset is a property worth 500k, without in fact effectively acquiring a capital interest in that property? (Remember, in looking at a contrived 'scheme', what your trust deed says, no matter how fancy the language, CAN AND WILL be 'looked through' by the court, except in genuine arms length transactions). Further, it is conventional wisdom, certainly in the metropolitan centres that nobody invests in residential property for the income - it's all about capital growth. Try explaining to a court the commercial viability of paying 500k for units in a UT which only owns a property worth 500k AND giving up the only upside - the capital growth. Good luck with that one.

Now, the HDT has apparently been around for a few years. It is not yet on the ATO radar because it doesn't (yet) present a threat to the fiscus. Why? Well, the 'problem' with the HDT only arises LATER, when the properties are sold to realise gains and so far not many such sales have occurrred or not enough for the ATO to wheel out the big guns. Knowing the machinations of the ATO, I feel certain that the big guns WILL be wheeled out in due course and then there'll be a lot of people running for cover. There is no established case law on the subject nor any ATO Public Product Rulings or Tax Determinations. In other words, investors have no precedent to rely on. Now you may have heard about Private Tax Rulings on the matter but that should not reassure you at all. Those rulings ONLY cover the party who applied for it, even if the ATO changes its position later. Private Rulings are purely a construct of the law designed to give individual tax payers certainty in their dealings. It is NOT to be used as authority for any proposition. In fact, many private rulings are given as a matter of convenience to satisfy individual taxpayers at a particular moment in time and the ATO often issues Public Determinations which differ markedly from Private Rulings.

This is a view I have formed after much investigation and analysis. No matter how diametrically opposed views on this may be, the ultimate arbiter has to be the ATO at some point in the future - not a good position to be in if you're after peace of mind!
 
I personally would be very keen to hear what ardent proponents of the HDT setup have to say to Ronin's specific concerns, especially regarding those examples he has provided which relate to Pt IVA of the ITAA.

Further, an interesting question (or ambigiuty) is the question of how "arms length" (ie in the interets of the unit holder from a non-taxation perspective) would the arrangement need to be before it was accepted by the ATO.

At one extreme there would be the case of where the unit holder received all the income (and future income growth). This would clearly be legitimate, but would, in effect, be a purely unit trust setup. At the other extreme would be one where the discretionary beneficiaries received 100% of the income from day 1, and the unit holder was declaring a loss for a non-income producing asset (clearly illegitimate). So where along that continium is a suitable point to please the ATO and also still gain taxation benefits????


Ronin said:
I have just subscribed to this forum after reading some very interesting threads and posts. There are certainly many knowledgeable people out there.

I was on the verge of setting up a HDT and have decided against it for reasons which will follow below. The threads dealing with this clearly suggest much angst and uncertainty. The re-assurance is not convincing because it almost always comes from a small group of promoters who obviously swear by the concept. In reality, the HDT structure is NOT unknown to the vast army of lawyers and accountantrs out there. I've spoken to accountants from some of the city's top firms and they've given short shrift to the concept. Many highly skilled practitioners are aware of the structure yet choose to avoid it. How is it in a country which has lawyers and accountants numbering more than 30,000, that you would be hard pressed to find more than a dozen sold on the idea? I read somewhere that a particular firm does 50 such structures a month. Well, that alone equates to over $1 million of recurring revenue EVERY YEAR... Food for thought, but I won't digress :)

Ignoring the asset protection issue in this post (I believe the UT part negates the asset protection anyway), the HDT concept would clearly satisfy the ATO definition of a 'scheme' in relation to Part IVA. Why? Well, the investor has a hand in all aspects of the structure and his/her dealings with the UT and/or HDT are certainly not at arms length. Nobody on this forum would argue in fact that this is not a contrived arrangement. In an example where property is purchased for say 500k, the investor acquires units entitling him/her to all the income relative to the 500k property ie. ALL the trusts assets at the time. Now the often touted advantage of the HDT is that all the income (less trust expenses) can be streamed to the unit holder, thereby allowing him/her to negatively gear. In this example assume the investor incurs 35k interest and receives 16k pa in income, allowing a healthy tax break. The ATO, lining up its ammunition, would point out that even if the investor enjoyed rental increases averaging 5% pa, it would take over 22 years for the 'investment' to break even... Mmm, the court would wonder (using the reasonable man test), was that commercially viable or tax driven?

It is then said that when the investor wants to sell the property, the income units are first redeemed (at potentially $1 per unit (!)) and the Trustee may then allocate the ensuing capital gain to the lowest tax beneficiary. This achieves Nirvana for property investors - the highest income earners gets all the tax breaks and the lowest income earner enjoys the capital gain. WELL REALLY! A court will almost certainly examine (in the context of the 'scheme') the acquisition of the units i.e 500k purchased units worth 500k. With the corresponding rental increases, the value of those units would have to increase accordingly, arguably in line with the value of the property. How, the court would want to know, could 500k be effectively paid for units in a trust whose sole asset is a property worth 500k, without in fact effectively acquiring a capital interest in that property? (Remember, in looking at a contrived 'scheme', what your trust deed says, no matter how fancy the language, CAN AND WILL be 'looked through' by the court, except in genuine arms length transactions). Further, it is conventional wisdom, certainly in the metropolitan centres that nobody invests in residential property for the income - it's all about capital growth. Try explaining to a court the commercial viability of paying 500k for units in a UT which only owns a property worth 500k AND giving up the only upside - the capital growth. Good luck with that one.

Now, the HDT has apparently been around for a few years. It is not yet on the ATO radar because it doesn't (yet) present a threat to the fiscus. Why? Well, the 'problem' with the HDT only arises LATER, when the properties are sold to realise gains and so far not many such sales have occurrred or not enough for the ATO to wheel out the big guns. Knowing the machinations of the ATO, I feel certain that the big guns WILL be wheeled out in due course and then there'll be a lot of people running for cover. There is no established case law on the subject nor any ATO Public Product Rulings or Tax Determinations. In other words, investors have no precedent to rely on. Now you may have heard about Private Tax Rulings on the matter but that should not reassure you at all. Those rulings ONLY cover the party who applied for it, even if the ATO changes its position later. Private Rulings are purely a construct of the law designed to give individual tax payers certainty in their dealings. It is NOT to be used as authority for any proposition. In fact, many private rulings are given as a matter of convenience to satisfy individual taxpayers at a particular moment in time and the ATO often issues Public Determinations which differ markedly from Private Rulings.

This is a view I have formed after much investigation and analysis. No matter how diametrically opposed views on this may be, the ultimate arbiter has to be the ATO at some point in the future - not a good position to be in if you're after peace of mind!
 
Hiya,

It's now 5am on Sunday morning, so hopefully this makes sense - feel free to email me directly if you like and I am happy to elaborate more.

Ronin, the theory that the vast army of lawyers and accountants are not keen on hybrid trusts would suggest to me that either they are misinformed, or do not yet understand the structure fully. In that case, they would be doing the right thing by advising against a structure they do not know how to use properly; that's just common sense. This does not take away from the structure's viability and strengths when used in the way it is intended.

Let me ask you, is negatively gearing in your own name classed as a 'scheme'? Is negatively gearing a managed fund a scheme? Is negatively gearing a plain old unit trust a scheme? Of course not. So, why would negatively gearing a hybrid trust be a scheme?

If everything is done at arms length, there should be no problem. This would involve keeping minutes and keeping the trust's discretionary spending to reasonable amounts. Same as if a person was running a business or investment portfolio through a company, for example.

The trust deeds and minutes that we use specifically state that the units are acquired to entitle the holder to an income stream when available. It also specifically states that those units entitle the holder to zero of the trust's capital holdings.

So, you are buying the rights to an income stream. That's all. You, and any other potential investors in the trust, are made well aware of this at time of purchase.

Never mind the value of the property purchased by the trust. By purchasing income units in the trust, you're expecting an income stream in proportion to the trust's assets. What the trust buys with that money is not the investor's concern. Yes, when the units are redeemed, I understand it should be done for fair market value. How does the trustee determine the fair market value for someone to buy units in a trust that has an element of discretion over it's income distributions, and where you have no control (at arm's length) over where those funds are allocated? Perhaps income growth could be taken into account. Certainly, any capital growth on the property should not, as the units are not specifically tied to the capital in the trust.

Not only that, the value of the units may descrease as the value of trust assets has increased, thus entitling the unit holder to a smaller percentage of income...

Part IVA is a favourite amongst those who like to play conservative or don't understand how and why a structure might work. If all of the minutes and records are kept properly, and everything is managed at arm's length, then we have plenty of evidence to display why the trust has acted in the way that it has.

Now, parts of your second last paragraph interest me:

Ronin said:
Now, the HDT has apparently been around for a few years. It is not yet on the ATO radar because it doesn't (yet) present a threat to the fiscus. Why? Well, the 'problem' with the HDT only arises LATER, when the properties are sold to realise gains and so far not many such sales have occurrred or not enough for the ATO to wheel out the big guns. Knowing the machinations of the ATO, I feel certain that the big guns WILL be wheeled out in due course and then there'll be a lot of people running for cover.

So, a few questions and comments directly on that one:

- Yes, the hybrid trust has been around for quite a number of years, in one form or another. The tax office are well aware of the structure and even provide it as an option when registering for ABN / TFN, and on the actual tax return itself.

- Ok, so now you say there are only problems later, when a property is sold. So, negative gearing is alright, yeah? Good to see we agree on something before you signed off.

- "And so far not many such sales have occurrred or not enough for the ATO to wheel out the big guns". Right. So if one accountancy is establishing fifty such structures a month (and that certainly isn't us, sadly!), I'd expect there'd be a fair few such creatures across the country. I'd imagine then, that there's a fair few properties being sold. Generally, if the ATO are concerned about something, they attack it. No news on that front yet.

- "Knowing the machinations of the ATO"... Ronin, what exactly do you know about the machinations of the ATO? Are you an accountant? Do you work for the ATO?

Sure, the hybrid trust could be described as an aggressive vehicle for tax planning. More accurately, it is a flexible structure designed to keep your assets safe. I've just purchased a property via a hybrid trust. My money is where my mouth is. I understand a number of high-profile accountants on this forum invest by similar means.

Cheers

James.

PS - The above thoughts are my own understanding, and I'm happy to be corrected by any other accountants here. They'll have a better idea than I do.
 
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Hiya Ronin

Welcome and a good first post !

Im not sufficiently skilled in this area to comment specifically, the 3 general (meaning I have nothing but anecdotal evidence) comments that I will make.

1. Most big BRAND accountants, or little accountants that I deal with on a daily basis are not aware of the structure, or poo poo it on the basis of lack of knowledge. I find the same with newish brokers and almost all bankers that dont work in that area.

2. Using any trust to purchase an asset that has future annual income potential would be considered by the ATO no differerently than an individual buying the asset. In both cases the net bottom line is the same. IVA would be hard to invoke, but then lets remember that the tax office has different views to the world.

3. If you need certainty,............. dont play at the edges.

Typically, the type of client that works with advanced structures is also the type of person that wants to get the best they can out of life generally. It seems to be a global attitude thing.

ta
Rolf
 
I'll say this up front - I felt the same way you did Ronin at the start about HDTs, but after further research, I came to a different conclusion.

Ronin said:
Ignoring the asset protection issue in this post (I believe the UT part negates the asset protection anyway), the HDT concept would clearly satisfy the ATO definition of a 'scheme' in relation to Part IVA. Why? Well, the investor has a hand in all aspects of the structure and his/her dealings with the UT and/or HDT are certainly not at arms length. Nobody on this forum would argue in fact that this is not a contrived arrangement.
I would be happy to argue as such. You could also argue that the owners of companies, trusts, partnerships and super funds do not deal with those entities at arms length. I pay for my lunches out of my company and get a full deduction for it. Is that a contrived arrangement? It certainly isn't covered in my employment agreement. People in partnerships and trusts can split their income. Contrived? The reality is that these structures are legal and have commercial justifications and The Commissioner can't whip out Part IVA for anyone attempting to use a structure with a basis in law. That's not what Part IVA is about. In my opinion as an accountant (and I would not be willing to say this unless I was absolutely certain), there is nothing about the use of a HDT that, when put together properly, would attract Part IVA. Nothing.

The TIA release a trust structure book with many trusts much more complicated than this one. Your argument that many accountants don't use this doesn't hold water. In one instance you suggest that you have met a lot of accountants, but then 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). No other reason? HDTs offer income units to help the person with the loan to purchase the asset in the HDT pay it off by securing a legal right to the income of the HDT. Did we mention asset protection? Land tax thresholds? The ability to give income to other members of the family later on to help them out? As part of an investment strategy? Good luck to the ATO on that one.

Ronin said:
In an example where property is purchased for say 500k, the investor acquires units entitling him/her to all the income relative to the 500k property ie. ALL the trusts assets at the time. Now the often touted advantage of the HDT is that all the income (less trust expenses) can be streamed to the unit holder, thereby allowing him/her to negatively gear. In this example assume the investor incurs 35k interest and receives 16k pa in income, allowing a healthy tax break. The ATO, lining up its ammunition, would point out that even if the investor enjoyed rental increases averaging 5% pa, it would take over 22 years for the 'investment' to break even... Mmm, the court would wonder (using the reasonable man test), was that commercially viable or tax driven?
That would be great musings for the judge. Unfortunately, the facts in the case would be -
1 - The asset was not owned by the individual.
2 - The units were subject to redemption at any time and were the only asset held.
3 - The trust was put together subject to the relevant laws.
4 - The contracts and application for units were filled in correctly.
5 - The units did not give the right to capital.
6 - The units were redeemed for more than their market value (in most cases).
Not much there for a judge to rule on. He/she can't rollback an asset that was never held by the individual, and the special income units which could possibly be rolled back give a right to income (not capital) that the trust has a right to redeem at any time from the date they were issued, and it was not the individual who rolled them back, they had no control over the matter, it was the trustee who did it. The fact of the matter is that the judge would have to treat it as a basic discretionary trust in any sort of proceeding once the units are redeemed (which is great) especially if the units were redeemed for an amount of their fair market value (which is the net present value of future income flows).

As for tax purposes, I would acknowledge that it wasn't fair price for the special income units and that the present value of future income flows is at all times the fair market value for the units and would be the value considered for the special income unit purchase and redemption. Nothing contrived there for tax, if you tried to claim the purchase of the units and their redemption on a straight dollar for dollar basis, then you would have problems, but I certainly don't do that and no one else I know does that. And as long as someone has paid something for an income producing asset, they are entitled to claim a deduction for the interest for purchasing.

You are entitled to your opinion but I don't see a solid basis for it. I am quite comfortable in my opinion and am very satisifed with my basis for it.

EDIT - Clearer english.
 
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We could debate these things back and forth ad infinitum. We have clients who have a HDT for properties and have been audited. The audit did not result in any breach of the law. The auditors do however seem to be concerned as to whether the property is being used as the individual's main residence.

Best not proceeding with someone if you don't think it's kosher Ronin.
 
JamesGG, thanks for the detailed reply which unfortunately perfectly fits the bill of an ardent promoter of the scheme:
1. So, the promoters such as yourself are the only ones who 'understand' the scheme? This kind of arrogance is not necessary. Quite frankly the scheme itself is not that intricate or difficult to understand. You should accept that there are many very competent people out there who understand it perfectly and give it a wide berth. If you can point me a single Top 10 accounting firm promoting this, I'd be very happy to pay for a consultation and share my experiences (er...Chan & Naylor are not a Top 10 firm, nor a top 5% or whatever they call themselves).
2. There is absolutley nothing wrong with negative gearing. However, you need to bear in mind that the only reason the ATO would allow it is because of the prospect of recovering revenue on the sale via the capital gain;
3. You contradict yourself about 'arms length'. Let's see...I set up a UT and HDT which I (or my wife) effectively control. I buy income units in the UT at a price far in excess of the market value (for the income only) AND give up the only possible reason for the investment, the capital gain. As you yourself point out, together with numerous other posters, NOBODY in their right minds would buy those units. 'Arms length' means that any reasonable third party should find the purchase a viable option BUT NOBODY EVER WILL!! You build your entire case on something that everyone openly admits is a crock!
4. Income cannot exist on its own. There has to be an underlying capital basis. So WHO paid for the capital component of the property in question? What do you think a court will find? HDTs might just possibly make more sense if the income units cost a fraction of the purchase price, with the DT buying the balance (unfortunately dramatically reducing their effectiveness).
5. Don't fool yourself about your meticulous documentation and minutes. They mean nothing where there is no arms length transaction or when a deliberate scheme is being examined.
6. Yes Part IVA is mentioned often because it has such BIG teeth! I recently talked to someone caught by this monster and he had to sell his PPOR to settle penalties and interest.
7. The title of my thread illustrates that I have no problem with the concept of HDTs. They are valid constructions. They have a place. Obtaining the negative gearing benefit should present no problem PROVIDED all the capital gain is also streamed to the SAME PERSON. The ATO won't attack the concept of the HDT itself, so knock yourself out setting up as many as you like. What they WILL attack is the contrived and artificial structure to negate the capital gain. In doing so, they will make the whole concept (as promoted here) redundant - the outcome will be exactly the same as if the high income taxpayer had owned the property directly.
 
Ronin said:
JamesGG, thanks for the detailed reply which unfortunately perfectly fits the bill of an ardent promoter of the scheme:
You crossed the line with that statement. This is a professional forum for people with genuine enquiries, not people attempting to 'stir it up'. If you had a genuine enquiry, you lost my support in resolving it.

Enjoy having a discussion with yourself.
 
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Ronin,
what is your hiden agenda?

For a first time poster you really bring out the big guns quite early. Are you writing in support of a well know big accounting company in Sydney who market their own type of investor trust?

Please stay professional in your postings; no need to be attacking other professional members of this forum.
 
Ronin,

If you would like to discuss the structures and possible Part IVA implications may I suggest a consultation with either :

Chris Bowman Director of Tax William Buck 8263 4000
Chris Batten Specialist Tax Consultant to the mid-tier firms 9231 5111
Margaret Antunes Principal Antunes Lawyers 9964 0499

I personally know Chris Batten and have dealt with Chris Bowman and Margaret Antunes. Chris B deals with many of the senior people at the ATO (Deputy Commissioner level) and doesn't seem to have a problem with the structures discussed.

Worth having a discussion with the people if that is your desire.

I understand your basic issue which is streaming of capital gains to someone other than the special income unit holder. Understand that. I'm curious then as to your views on different classes of shares where shareholders are entitled to receive income only but no capital component and have no voting rights ?

It sounds as though your are ok with the structure as long as the special income unit holder also receives the capital gain when the property is sold ? Am I right in stating that ?
 
Rolf, no hidden agenda. Just looking for clear answers. My response to JamesGG was in keeping with the dismissive nature of his post. He was dismissive without specifically addressing the clear shortcomings of the scheme. No offence intended to any party...
 
Many thanks for those contacts coastymike. Yes, the most artificial part of the structure is the cost of the income units vis-a-vis the anticipated gain. As a benchmark (continuing with the 500k example and sticking with fixed income units) this amount invested in a bank at current fixed interest rates would yield about 30k pa and give youy all your capital back. How do you explain why you would settle for say 18k pa AND allow all your capital to be extinguished if not purely on the grounds of tax advantage? Distributing the capital gain (as income) back to the income unit holder would appear to deal with this problem. This of course brings into question why you would do it in the first place...
 
No problems Ronin I'm sure they would be willing to discuss these areas with you. I understand your concerns but the same issues could be applied to a discretionary trust which holds a business asset. The trust has the potential to distribute both income and capital at its discretion. On the sale of the business some of the capital gain made on the sale (disregarding the small business CGT concessions) could be streamed to any of the beneficiaries. This has been accepted by the courts and the ATO. So streaming of income and capital to different beneficiaries doesn't seem to be an issue. In fact that is the one of the benefits of a discretionary trust (not taking into account the asset protection and estate planning benefits).

If you apply the same logic regarding Part IVA then the same logic would have to be applied to the sale of the business. Should the capital gain be distributed in the same proportion as the income. Would you look at all prior year distributions to determine what percentage of the gain went to the beneficiaries or the most recent year. This brings us to some interesting trust income definitions. The preferred method by the courts seems to be the proportionate approach which was adopted by Justice Hill J in Davis & Anor v FCT, “a share” is interpreted as a proportion or percentage of the trust distribution. Firstly, the share of trust income to which the beneficiary is presently entitled is calculated as a proportion or percentage of total trust income. This percentage is applied to the section 95(1) net income, to determine the amount of net income to be included in the beneficiary’s assessable income under section 97(1). If the beneficiary is entitled to one tenth (10 per cent) of trust income, the beneficiary will include 10 per cent of the net income in the beneficiary’s assessable income, irrespective of whether net income exceeds trust income or is less than trust income

Provided that there are beneficiaries who are presently entitled to the whole amount of trust income, net income will be allocated among these beneficiaries proportionately, and the trustee will not be assessed under sections 99 or 99A regardless of the amount of net income. Where beneficiaries are not entitled to the whole of trust income, the balance of unallocated net income will be assessed to the trustee under sections 99 or 99A.

Where net income exceeds trust income, presently entitled beneficiaries will be required under section 97(1) to include in their assessable income, amounts which are greater than the amounts which they either received or are entitled to receive,. Where net income exceeds trust income due to capital gains, income beneficiaries who are presently entitled to trust income will be taxed on a proportion of the net capital gain included in net income to which they have no entitlement.This inequitable result is inconsistent with legislative intention to tax the beneficiary who is presently entitled to the capital gains.

In contrast, where trust income exceeds net income, the amount included in the assessable income of presently entitled beneficiaries will be less than the amount of trust income to which they are presently entitled. Any excess of trust income over net income will be distributed tax-free. This result is equitable because it allows the flow-through of tax concessions which beneficiaries would have received if the income had been derived through a partnership or as an individual taxpayer.

Whilst the Commissioner may assess beneficiaries on distributions of trust income in excess of net income by literally applying sections 99B the Commissioner does not do so in practice. Despite the problems that arise when net income exceeds trust income, the proportionate approach is widely accepted as the correct interpretation of section 97(1).

All of us in the tax profession acknowledge that this is an interesting issue not just exclusive to hybrid discretionary trusts.
 
Good morning Ronin

Welcome to the forum and thank you for the robust discussions that you have started on hybrid trusts.

I must admit, the people that Coasty Mike has mentioned are probably the best examples of where to find "expert" information on these structures.

In addition, can I also suggest that you consider PBR 28993 where the tax office considered a typical hybrid trust and expressed their opinion that the interest would be tax deductible.

Yes, I fully understand the fact that this ruling is worthless to anyone else other than the person it was issued to, but, it does show that the Tax Office are well aware of the HDT and have no major concerns with the structure.

For what it is worth, I agree wholeheartedly with you in that the tax office may have a potential problem with the CG made by a HDT on the sale of a property. This is naturally an area of concern for anyone using them; or recommending them. It would be foolish not to consider this potential concern.

However, it is my understanding that the unit holder of the special income units will receive their share of the CG that is attributable to the units issued to them. It is also my understanding (and I am happy to be corrected if I am wrong) that the trust has no choice but to distribute the CG to the unit holder and that should the trust redeem its units then a CGT event will occur anyway for the unit holder.

We're all learning all the time and any knowledge that you have will be gratefully received in this forum.

Have fun

Dale
 
Thanks

Thanks all - this is so far becoming an excellent (and highly educational) thread which I will certainly read and re-read this week :)
 
Hiya Ronin

Im consistent user and supporter of NLP type technologies. Id suggest dont be surprised when people jump in your face, even though you feel you arent being heavy handed.

The choice of words in context, rather than the content per se often have emotional triggers we dont expect.


Example

"Scheme" is described as one of 4 things in dictionary.com

A systematic plan of action: “Did you ever carry out your scheme of writing a series of sonnets embodying all the great epochs of art?” (Edith Wharton). or
A secret or devious plan; a plot. See Synonyms at plan. or
An orderly combination of related parts: an irrigation scheme with dams, reservoirs, and channels. or
A chart, diagram, or outline of a system or object.

Which most closely fits the context of the discussion ?

Chuck in a few more carefully chosen one like promotor, and all of a sudden what looks innocent on the surface can be taken as quite confronting.

What I think if when I hear "promotor of a scheme" in this context, I get visions and flashbacks of Kenry Haye.

Ta
rolf
 
Ronin,

If you don't like the concept, don't use it. Then you can feel confident that the ATO won't come after you.

As for me, my understanding is that the ATO is both aware of and supportive of these vehicles, used in the appropriate manner. Exactly as they approve of companies, partnerships and other asset holding and management structures - used within the laws and regulations that define them.

As to 'artificial' - all financial instruments are artificial by nature, so it's an unnecessary distinction. Definitely the unitisation approach is different to that taken in certain other vehicles, but units (or shares) of some form are at the basis of many legal structures and are covered in existing laws.

All that is relevant is whether the ATO and Federal legislation do not disallow an instrument.

In this circumstance there's no real right or wrong, there's only legal and illegal.

As to accountants understanding the structure or not - well few accountants (though a lot more than ten years ago) understand property investment - though most are 'aware' of it. I've even had accountants recommend not investing in property (back in the mid 90s) due to the imminent collapse of the market and removal of negative gains.

Tax laws are very complex and accountants are human, just like the rest of us....or so they claim :)

I've dealt with a number of the top accounting firms over the years and generally have not found that their advice is necessarily any better or more legal. I seem to remember one or two of the largest accounting firms being caught in providing illegal advice over the past few years.

In any case if you're using a top ten firm for your level of investing then you'd be better looking at much more complex tax minimisation schemes than a HDT (which frankly is optimal for a fairly limited range of investment approaches), so no wonder they'd not be advising using a HDT approach in most instances, there are better approaches.


And James has not promoted the structure to you or to others, he's simply employed it in his own investment and was responding to your (I hope) genuine question.

I feel that you owe him an apology.

Cheers,

Aceyducey
 
A sincere thank you to all those adding quality to the discussion. As there is no legal precedent or definitive ATO Rulings, ultimately views are likley to remain divergent.

coastymike uses the analogy of a business run through a discretionary trust and then having CGT on its sale being disbursed among multiple beneficiaries. This is a good example of the value of trusts but it pre-supposes that the business was built up from scratch with the trust as the chosen vehicle. The courts will protect the incremental build up of value within a trust. It's why I have a discretionary trust and am a firm believer in its long term value.

The key difference here is that the HDT builds up nothing. Purely by the wording of a trust deed, it SUDDENLY acquires a capital asset! Can smart wording really be responsible for such profound value shifting? The defining transaction is the purchase of income units and is fundamentally flawed for the following reasons:
1. If 9 out of 10 people (buying in their own names) paid 500k for a unit in a 10 unit block, how is it commercially justifiable for you to pay 500k for income units which only entitle you only to income that effectively flows from that property? It defies logic and immediately lacks credibility;
2. The capital asset (the property) would appear to have been acquired at NIL value by the DT;
3. The income units are worthless and no bank will lend against them. The deed allows their redemption at virtually NIL value;
4. Why would the ATO allow substantial tax deductions for the borrowings on an asset which is potentially worthless and which will NEVER provide a commercially viable return to the investor? Thus far all the evidence points to an expectation of capital gains down the track. The next person to request a Private Ruling on this issue should boldly declare that they have no expectation of ever receiving the capital gain. Guess what that ruling is going to be?
5. If 500k is handed over to purchase units, presumably the units are worth 500k. The trustee must provide a rationale for the calculation of the value of the units. This has to make sense in the context of the property being worth 500k. Therefore to all intents and purposes the value of the income units = value of the property. Asset protection simply cannot be achieved and somehow I think the first test case in this area will come from a smart lawyer unravelling the contrived transfer of the capital asset to the DT.
6. People make dumb investment decisions all the time and it is not for the ATO to tell you how to invest. The income unit acquisition may well pass sanction had you puchased from a genuine third party (like Westpoint) - but you didn't. You effectively purchased it from a trust that you (and/or your wife) control.

I would like to repeat that I have no problem with the HDT from a STRUCTURAL point of view. They are not new and have in fact existed for centuries. Used properly they will serve some people well. In this instance my opinion remains that it is being packaged in a manner which will not withstand intense legal scrutiny due to the fundamentally flawed nature of its defining transaction.
 
Hello Ronin

I believe that we will eventually agree to disagree....and in doing so, will have heard further thoughts and opinions from each side to give us both further understanding.

I am not sure that I completely follow your thoughts.

The tax office have no problem with people borrowing money to buy units in a managed fund. That managed fund starts with no assets of its own and grows because individuals acquire units in the fund entitling the unit holder to a share of the income of the fund. The individual is never entitled to the underlying shares, property or other assets of the managed fund. Just the income.

Yes, the unit holder can sell those units and make a capital gain, but, what if the intention is to hold the asset forever and never sell?

For example, I am well aware of investors in real estate who buy properties in their own name who never intend to sell those properties. If we apply your reasoning, the interest paid on borrowings to acquire those properties would no longer be tax deductible either because the investor will never sell and therefore never declare a Capital Gain.

Furthermore, it is not uncommon for a hybrid trust to acquire multiple properties through using the built up equity within the HDT. Thus, the wealth, equity and value of the trust grows with time. How does this differ from a discretionary trust that builds up wealth over time in much the same way?

As for asset protection....the creditor can potentially take all the units that the trust had issued. But, in doing so, the creditor is not entitled to the underlying asset, just the income.

As has also been discussed elsewhere on this forum of late, even a humble discretionary trust appears to be under threat of appearing not to provide all the asset protection that we would like it to provide.

Ronin, I am glad that you have researched this matter quite extensively and come to your own conclusions. My own research has provided me with differing answers to your own.....Don't you just love the uncertain world of tax!

Have fun

Dale


Lastly, I am surprised that you dismissed the private ruling that I brought to your attention.
 
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