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