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ATO Taxpayer Alert on Hybrid Trusts

Discussion in 'Accounting, Tax & Legal' started by austing, 27th Mar, 2008.

  1. austing

    austing Well-Known Member

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  2. MattR

    MattR Well-Known Member

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    Thanks for this link.

    It will be interesting to see how the market place handles this - wonder if it will cause a wee bit of panic
     
  3. NickM

    NickM Co-founder Staff Member

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  4. austing

    austing Well-Known Member

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    Hi Nick,

    Yes it seems that if a good deed such as the MGS HDT was being used and implemented correctly there shouldn't be too much to be concerned with.

    However could you please be so kind as to clarify what the following bolded statement means which I assume relates to redemption of Units:

    "The Tax Office is not concerned about all 'discretionary', or 'hybrid’ trust arrangements. Rather, we are concerned about negatively-geared trust arrangements which involve the taxpayer incurring interest expenses or borrowing costs where all or a proportion of the borrowed funds could be used for the benefit of the beneficiaries, or where the taxpayer’s interest in the trust could be brought to an end before their costs of investment have been recouped.

    Thanks - Gordon
     
  5. NickM

    NickM Co-founder Staff Member

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    Hi Gordon
    The ATO is referring to cases where the unit holder redeems their units prior to the sale of the asset that attaches to their units.

    EG i buy units $300k and neg gear for say 1 yr.
    Yr 2 My wife starts to earn more than me so i redeem my units for $1 each and issue new units to her. she now claims the neg gearing.
    Yr 3 Wife redeems units on 1/7 at cost. Property sold 31/7 cap gain distributed to lower income earner.

    This type of conduct is frowned upon and the ATO are tracking down the culprits that have abused the way the HDT is meant to operate.

    Nickm
     
  6. austing

    austing Well-Known Member

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    Hi Nick,

    Thanks for that info.

    Am I correct in assuming however that redemption of units prior to the sale of the asset is still okay as long as they are redemed at market value?

    Cheers - Gordon
     
  7. Rob G.

    Rob G. Well-Known Member

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    It seems well settled that for interest on borrowings to purchase a unit to be deductible, the income and capital growth related to the assets funded are "quarantined" from other beneficiary's interests.

    This means that for units in a unit trust or hybrid trust, you cannot normally stream income to other beneficiaries.

    ALSO (and this is where many promoters were misleading people) the trust deed MUST require units to be redeemed for MARKET VALUE, this reflecting the value of the underlying assets. So you cannot stream a capital gain to other beneficiaries e.g. by redeeming units at less than fair value from the holder.

    Market value might reflect the value of the underlying trust assets, or the present value of the future cash flows, etc...

    Look for these features in your deed. If there is discretion for the Trustee, then you need to get some advice - even if you never intended to "exploit" these features.

    Also, it has always been open to the Commissioner to look to the purpose of an "investment" where it seems non-commercial - i.e. where it seems unlikely that they will ever recoup their money but will claim deductions in the meantime (Fletcher).

    This is only very broad & general info, the issue has been raised a number of times on this site. Try doing a search on hybrid trusts and you won't be surprised by this ATO announcement as it has been simmering for a long while.

    Cheers,

    Rob
     
  8. NickM

    NickM Co-founder Staff Member

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    Gordon, yes that appears to be OK, but i would not be doing anything until the ATO finalises their view
    Rob is pretty much on the mark
    Nickm
     
  9. austing

    austing Well-Known Member

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    Rob/Nick,

    Thanks for your responses.

    Unfortunately for those who have redeemed HDT units in the last few years or so based on the rules that were thought to be okay at the time they will just have to hope for the best.

    Cheers - Gordon
     
  10. Nigel Ward

    Nigel Ward Team InvestEd

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    The trouble of course is there are well constructed hybrid trusts and poorly constructed ones.

    Further the terms of issue of units may or may not get you into bother regardless of how well the trust is drafted.

    If there's a clear history of an investment actually yielding returns and those returns actually passing through to the unitholder (who then duly includes those distributions in their taxable income), you're in a much stronger position.

    As always, it doesn't pay to be on the bleeding edge when it comes to tax structuring, but nor does that mean you can't sensibly arrange your affairs in a commercial way within reasonable boundaries.

    Cheers
    N.
     
  11. NickM

    NickM Co-founder Staff Member

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    Gordon
    I would be very suprised if the ATO made any restrospective changes
    any new policy would be effective from the date of the announcement

    The ATo do acknowledge that they also have not provided a clear position in the past.

    we just have to take note and move forward with their policy whatever it may be
    NickM
     
  12. Liverpool St

    Liverpool St Well-Known Member

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    More on Hybrids

    Speaking of hybrids. With the changes to superannuation and property. Can someone give me some insight into transferrring a property from a HDT into a SMSF?

    Thanks

    LS
     
  13. Rob G.

    Rob G. Well-Known Member

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    Depends on the details ...

    However, if the Trustee is a related party then you have a problem unless it is business real property.

    Maybe even if the Trust acquired it originally at arm's length ????

    Don't do anything without specific advice on this one.

    Cheers,

    Rob
     
  14. Nigel Ward

    Nigel Ward Team InvestEd

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    As Rob said, be careful and get advice.

    The changes are not to super and property. Rather super funds can now borrow subject to some strict rules (including that asset is held on trust and the borrowing is limited recourse to the asset only). All the existing rules about what assets can and cannot be acquired still remain.

    See your advisers before you do anything.

    Cheers
    N.
     
  15. Liverpool St

    Liverpool St Well-Known Member

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    HDT to Super

    Thanks Nigel/Rob,

    What with land tax with no threshold here in NSW, I am just about had enough of my HDT and will eventually transfer it to personal names. I just don't like the idea of capital gain tax and stamp duty. I suppose I can offset the CGT by seeing Steve and buying some grapes. The stamp duty I will borrow...thanks Dale

    LS
     
  16. DaveA

    DaveA Well-Known Member

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    i dont understand why you are sick of ur HDT.

    There should of been no change for you if you dont want to redeem your units. Or is it the fact you dont want the risk of interest deductions being disallowed...
     
  17. Liverpool St

    Liverpool St Well-Known Member

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    HDT's


    Well,

    There's that...full interest rates being disallowed.
    No threshold for land tax in NSW
    Higher accountancy fees for structure
    Not all financial institutions lend against corporate structures
    Potential future changes and scrutinisation by the ATO

    LS
     
  18. Saskatoon

    Saskatoon Well-Known Member

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    Ls, won't you be up for more stamp duty & GST transferring into personal names? The purpose of the trust is asset protection for up to 80 years - involving long term plans, not comparatively short term tax issues. I am less worried about future changes and taxes because of our trust! If one doesn't try to bend the rules why would the ATO be interested?
     
  19. NickM

    NickM Co-founder Staff Member

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    LS, if you have conducted your trust in a correct manner ( & i am sure Dale would have guided you correctly) then dont panic. It is a long term structure. rather than sell, buy more. Buy interstate. revisit why you established the trust in the first place then work through the pros and cons of your options.

    Cheers
    Nickm
     
  20. julia

    julia Active Member

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    Just a couple of points:

    If you can't redirect income or capital gains until after the units are redeemed and the units must be redeemed at market value then there are not income tax benefits to be gained from using a HDT. And as the units are entitled to be redeemed at market value where is the asset protection?

    The ATO didn't change its opinion it has held the same opinion for over a decade