Property Investors Trust - the facts

“I have spoken to Chris Batten about the Property Investor Trust (PIT) and with Chris’s permission have reproduced an email I have received from Chris today.

Dear Nick

I have seen the PIT Deed and can confirm that it is a hybrid discretionary trust that has the ability to direct income to discretionary beneficiaries that would otherwise go to Income Unitholders under the deeds you currently source. The problem is that the ATO MAY apportion the interest in line with IT2684 and Fletcher & Ors v. FC of T 91 ATC 4538 at 4957. The hybrid discretionary trust has many benefits for property investors and to push the limits whereby the arrangement becomes artificial and contrived is asking for trouble from the ATO.

Regarding the alleged land tax savings as a result of CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2005] HCA 53, the promises made by the marketeers of the PIT are just plainly incorrect. The OSR, for reasons unknown to me, have been assessing unit trusts as non-special trusts and therefore allowing the exemption. I have always indicated that the OSR could assess a unit trust as a special trust in accordance with the definition contained in section 3A of the Land Tax Management Act 1956. I understand that Ed Chan advocates clients set up a separate unit trust for each property purchased in NSW to enable the client to get the land tax threshold for each property. I spoke recently to some senior people at the OSR and after consultation with the State Government Treasury Officials the OSR will be assessing unit trusts as special trusts from 31 December 2006. This means that unit trusts will no longer receive the exemption. The OSR have indicated they will have no interest in who holds the units in the unit trust.

I would strongly suggest you advise your clients of the above land tax changes as it may affect their decision to proceed with a unit trust/hybrid trust structure. I understand Ed Chan is NOT advising clients of this as he either doesn’t know or wants to sell more trusts. Whichever it is it is not good for the clients as they will receive an unpleasant surprise when they receive their next land tax assessment.

If you have time have a look at my recent show as I interviewed Ed regarding the PIT and you will get a chuckle when you hear his response to my question of how the PIT works. He said

“So rather than me getting into the nitty gritty I might saying something that’s technically not right because I’m not really in that space.”

It’s very dangerous to advise clients of the state and federal tax consequences of a particular structure when your “not really in that space”.
Regards
Chris Batten”

 

Hi Nick, forgetting about the supposed land tax exemptions then, are you saying that a PIT basically just resolves down to a HDT ?

 

Yes, but according to Chris - worse than that as the income is discretionary thus jeopardising the interest deductibility of the loan which was used to purchase the units in the trust
NickM

 

How is that different from any other HDT?

 

This is one of the concerns I raised with Ed Chan at the SIG meeting. There was no satisfactory answer. Anyone else who was there care to comment?

N.

 

The SIG talk raised a lot of questions, many of which were not answered in great detail by Ed or Tony on the night. I wasn't happy with their lack of specific information on the structure but understood that the evening was overall just a basic rundown of their services. A "whetting of the appetite", if you like, for investors to find out more.

Probably not a good day for me to comment- I'm semi-depressed due to two land tax bills that just landed in my letterbox. Soon to be $3,500 poorer.....

 

Govt Revenue

Probably not a good day for me to comment- I'm semi-depressed due to two land tax bills that just landed in my letterbox. Soon to be $3,500 poorer..... [/QUOTE]


Me too Jacque,

I received mine today to the tune of $3516.45 to be precise. Can someone explain why the landtax threshold of $352K is exempt for holders of property in a HDT??

Bobby

 

I assume by HDT you're referring to a Hybrid Discretionary Trust, and not the PIT structure Ed Chan is talking about.
HDT's actually are not exempt and have $0 threshold, as per a normal family trust. I wish it were not the case, but my bills tell me otherwise
I hate land tax- it's worse than getting the Credit Card bills after the Christmas sales!!!

 

Hybrids

 

Thanks Nick for posting this.
Nigel raised these very points at the SIG meeting. I felt the answers were quite evasive.

 

Wow.
I actually asked Ed and Tony to answer the thread on Somersoft that was created by Seech, after the SIG Meeting I organised last month. To date there has been no answer.
I always had the feeling it was too good to be true

 

JScott,
The HDT i use which i purchase from Chris Batten, specifies the rights of unit holders.

If a unit holder owns special income units then the income generated from the funds invested MUST be distributed to that unit holder. This point is extremely important in justifying the tax deduction for the individual.

It was only a matter of time. The cloak and dagger approach always concerns me.

NickM

 

Every solicitor has their own opinion... I use Chan & Naylor and and am very happy with them and the P.I.T. If you speak to their lawyers (kevin munro & associates) that draw up the trust deed, they believe it is fine and that it's Chris Batten that has mis-understood it. These guys are all competitors so I'm sure they'll each always find flaws in the others ways...

 

Spot on.

Everyone does have their own opinion. In relation to the land tax point if you follow the link below you will see the OSR and State Treasury Officials opinion. Maybe Batten, the OSR and the State Treasury Officials have got it wrong. You can object if you believe they are and fight them through the courts.

High Court Decision on Unit Trusts (copy also attached)

http://www.osr.nsw.gov.au/portal/page?_pageid=33,1&_dad=portal&_schema=OSRPTLT


In relation to the interest deductibility it might be wise to have a look at IT2684 to see what the ATO’s view is in relation to interest deductibility. Paragraph 9 of IT2684 outlines when interest will be apportioned. “An interest expense is not fully deductible in those cases where the expected return from the units, both income and capital growth, does not provide an obvious commercial explanation for incurring the interest”.

Borrowing to acquire units that give a right to a distribution of the first years rent and NO rental increases does appear to lack the commercial explanation the ATO is referring too.

Anyway as you state they all have their own opinions.

Nick M

 

Always good to hear the other opinions etc. As for Land Tax - I'm not really sure and what you've provided looks right. I'm in W.A. so don't care about NSW Land Tax - well not yet anyway - maybe I should buy in NSW (has it bottomed-out over there yet)??? Ed Chan has said to me this morning that he is currently drafting up a reply regarding all the forum posts about the P.I.T. so looking forward to what he has to say...
(The thing is with our governments - they change the rules every bloody month)

 

Any news on Ed Chans response and where he will be posting it?

 

No, not yet.... I've just emailed him to see when.

 

Ultimately, I'm not sure whether it matters what Ed says in defense of the structure.

Views can legitimately differ when interpreting laws. There's not much point getting into a "my lawyer/QC can beat up your lawyer/QC" kind of argument. (Altho that might be fun to watch )

Similarly, neither the ATO nor the state revenue offices have a monopoly on being right (altho they get to change the rules of the game sometimes ).

I guess it can be very difficult for the average investor when even the experts disagree about what does and doesn't work. I think the take home message is this:

Ultimately you, the taxpayer, will wear the consequences of whether or not the structure works. Taking that into account, if I were the proverbial investor in the street with two different options, I'd tend towards the more conservative option. Bear in mind that for ATO purposes (and Qld Stamp duty purposes) there are general anti-avoidance provisions with broad potential application.

Just my 2.2 cents worth.

ps I should add that I thought the "wealth psychology" side of Ed's SIG presentation was really good. I thought he was able to succinctly explain some key concepts about debt and time.

 

From Tony Melvin of Chan & Naylor:

Hello Jason,
Would you be so kind as to post this on the forum?

Dear Client and Property Investors,
For the purpose of clarifying recent comments and references made by Chris Batten in his email and via several internet forums, I have asked both Ed Chan & our Tax Lawyers from Kevin Munro & Associates to comment.

For the official Response regarding the Property Investor Trust™ Deed please click on the hyperlink below:

Chan & Naylor link

 

I thought I'd ask Chan &Naylor if I could post this to show the other side of the story... At the end of the day this is just two competitors in the market-place, each saying that the way they do it is better than the other...