Worked Trust Investment Structure Example

[Nominees]

The units are for "capital" distribution only, once the property is sold.

So if you own all the units and sell a property, then you are awarded all the profits from the sale and you have to pay tax on that (or 50% of the capital gain.)

So the capital gain is distributed to the beneficiaries in proportion to the units they hold.

Also the good thing with hybrid trusts is that if your wife doesn't work (I am sure she does even if it is at home, but you know what I meen) then you can distribute ALL the INCOME (notice income is different from capital gains) to her (even if she has no units), and you can still claim the interest repayments against your own salary.

This is why the trust IS a Discretionary (i.e. distribute the income at YOUR discretion) Hybrid (the units will tell who gets what once the property is sold) trust.

I am not a lawyer so please don't take my word for it

Nom

 

[Ultra]

Hi Nom

I don't think the ATO is going to be real impressed with an interest deduction claim against a discretionary income distribution.

Thanks
Pam

 

[alpina]

nom,

if what you are saying is correct, i have seen the first real benefit for us setting up a trust

seems weird though that the ato would allow one person to claim to the interest without collecting the income (ie, passing the income to another).

could dale or nick confirm if this is correct?

julie

 

[djsherly]

Originally posted by Nominees

A more confusing point is whether the income from a hybrid disc trust can be distrubuted to beneficiaries that are NOT unit holders and the answer is YES!

I made double sure that this is correct. And I was told "Absolutly". I am using a hybrid discretionary trust from MGS.

Hey Nom,

I agree with you on the above point - you can distribute to non unit holders. But how does this affect the deductibility of any interest paid to maintain a loan on those units.

It seems pretty clear to me that if you've got a loan for the units, you can only claim the interest on that loan if you've got sole right to the income of those units.

I see that Dale and NickM haven't touched this topic for a while...

Chris.

 

[MF35]

While people seem to have pointed out some of the benefits a trust can offer I'm not convinced they can all be utilised at the same time. Hence the question I asked earlier in this post. What we need to work out here is what characteristics of a Hybrid Discretionary Trust can be used at what times. I thought that such a Trust could 'switch' from one mode to the other. That is, operate with either the characteristics of a Unit Trust OR a Discetionary Trust. Not necessarily both at the same time. I'd love to be enlightened if I'm wrong here, but I didn't think the tax man would allow such flexibility.

Nominees, if as you suggest all the income in a HDT could be distributed at the Trust's discretion even when the Trust had units on issue to one or more people, and units are only linked to the distribution of Capital Gains, you would be able to distribute all income AND CGs as you liked with a few simple transactions.

For example, if 250k of units were on issue to beneficiary "A" (a high income earner who was negative gearing) and all income was at the same time being distributed at the discretion of the Trust (including income from the investment that the money raised from the sale of units to "A" was used for) then all you would have to do to have full discretion on Both Income and Capital Gains is have the trust buy back the units from "A" before it sold the investment relating to those units. IE - buy back the units and you no longer have any obligation to the unit holder when distributing CGs. This would effectively be license to distribute Income and CGs as you liked through the same Trust at the same time!

Be nice if it can be done but seems to good to be true to me. I'm leaning towards a more limited use of the "Hybrid" characteristics of the Trust.

I'd love to be wrong though.

DALE ???

This all said and done, even if the use of such characteristics have a more limited use I still believe there are many good reasons such a Trust would benefit someone who planned to accumulate multiple properties. Just means we might have to plan ahead with some specific goals in mind. Which many will suggest we should be doing anyway.

MF

 

[Kevmeister]

In other threads I have got the opinion that the Hybrid Trust generally operates EITHER as a unit trust OR as a discretionary trust, not both at the same time. So I agree with MF35.

NickM stated that buying units in a Hybrid Trust represents a right to income. A "right to income" seems very much at odds with the "discretionary" nature of a trust, and that (to me) reinforces the concept that the trust is either one or the other at any given time.

With respect to buying units in a Hybrid Trust and then having the income paid to your [non-working] wife, I can't imagine that the ATO would look favorably upon this situation (claiming interest for an investment earning no income). I think this might be viewed upon as a device intended to minimise tax.

With respect to negatively/positively geared properties, my understanding is that it is the collective gearing of all properties in the portfolio that dictates whether the Hybrid Trust would be issuing units or reverting to its discretionary nature. In other words, if the portfolio is negatively geared (in total), external unit holders hold the units and claim the negative gearing benefits; if portfolio is positively geared, buy back the units and have the trust revert to its discretionary nature (presumably distributing the income to the beneficiary in the lowest tax bracket).

The idea of putting positive/negative geared properties in separate trusts is not a suitable approach in my opinion, because sooner or later negatively geared properties tend to become positively geared. You might run separate trusts for other reasons (eg. greater asset protection), but I would not [personally] split into multiple trusts on this basis, for this reason.

Like most of the posts on this thread, I am putting forward my opinion/understanding, and this may be wrong.

O' Dale, O' Nick - where are thou?

 

[djsherly]

Thanks Kev,

you've pretty much summed up my understanding, much more eloquently that I could have done.