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January 30, 2005 - 6:50 am

Chris,

While I don’t know for sure, I tend to agree with your earlier comment that any attempt to claim deductions against your PPOR – even if you are technically renting it – is likely to fail.

I would imagine the ruling Terry posted regarding unit trusts would also apply to hybrid trusts – since in essence they’re also unit trusts if units have been issued.

Cheers,
GP

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January 30, 2005 - 2:04 am

Originally posted by redwing:

the structure of a Hybrid discretionary trust is such that you can distribute losses

No, even a hybrid trust can’t distribute losses.

The way you can negatively gear with a hybrid trust though is to borrow in your own name and then buy income units in the trust. That way the trust actually makes a profit, since it doesn’t have any loan interest to pay back, and can make a distribution to you. That distribution would be less than the loan interest and so you personally would make a loss which can be offset against your other personal income.

So even though the property is negatively geared, the trust itself is making a profit.

GP

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January 29, 2005 - 2:25 pm

Originally posted by masteraccountants:

As long as any transfers to the Trust, to pay for deposits on properties to be purchased for example, are recorded as loans, then you also avoid the Trust Transferor Rules.

Are you certain about that, Chris?

From that same document we discussed before:

You will be regarded as a transferor if you:

• have at any time transferred property or services to a non-resident discretionary trust estate

Then under the definition of services:

Services

This term includes any benefit, right, privilege or facility. Services include a right in relation to real or personal property as well as an interest in real or personal property. Services also include a right, benefit, privilege, service or facility that is provided or is to be provided:

• under an arrangement for or in relation to:
– the performance of work, whether or not property was also provided as part of the work performed
– the provision of entertainment, recreation or instruction or the use of facilities for entertainment, recreation or instruction or
– the conferring of benefits, rights or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar payment
• under a contract of insurance, including life assurance or
• under an arrangement for, or in relation to, the lending of money.

I’ve run up against this same wall with indirect value shifting when trying to do interest-free loans between companies.

Cheers,
GP

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January 28, 2005 - 12:22 pm

Cruiser,

Originally posted by cruiser:

I think Terry was talking about the discretionary trust in the second quote of his in your post.

Those trust loss provisions apply to all non-fixed trusts.

Yes, losses can be carried forward

Not according to those provisions unless certain conditions are met, which it seems to me would be impossible for a pure discretionary trust (at least as I interpret them). It looks like the only way losses could be carried forward is if the trust made a family trust election.

with hybrid trusts, if I am the borrower, then I/my assets are vulnerable in an asset protection sense

I believe your personal assets are only at risk if you personally get sued, either in your own right or as trustee of the trust (discretionary or hybrid).

While I don’t think the trust assets could be touched if you personally got sued, the units you held would be part of your assets that could go to your creditors, in which case they’d become entitled to the future income from your trust.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 27, 2005 - 3:33 pm

Originally posted by terryw:

The remander of the profit could then be distributed to your spouse or other low income beneficiaries.

By my understanding, you shouldn’t do that while there is an income-unit holder in the trust. I believe discretionally distributing the income at that time would likely disqualify the unit holder from claiming an interest deduction.

but a loss could be carried forward to the next year to be offset against future profit

I think that depends on the nature of the trust and whether or not it has made a family trust election. See schedule 2F, subdivision 267-B of the 1936 tax act, the first entry of which is here:

http://tinyurl.com/6b848

From there you can select “Contents” at the top of the page and look at the other subdivisions there.

GP

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January 26, 2005 - 12:04 pm

Betterbiz,

The company is making an INVESTMENT in income units in a HDT. End of story.

I certainly hope so!

think of it as my HDT

But that’s the thing: if it was your HDT and only returning a small amount of income (say 2%-3%) with no option for capital gain, and expected to remain like that, then I think as a director I would have trouble justifying that as being in the best interest of the company shareholders given I could get 5%+ just by putting the money in the bank. I’m sure if the shareholders were other than myself, they would certainly be questioning it.

With your HDT though I could argue that the expectation is for better income returns over time, as I have no control over your trust, but with mine, where I’m a trustee, I have the ability to ensure that doesn’t happen if it’s in my personal best interest for it not to (say because the tax rate is lower that way – possibly leading to a part IVa issue?).

don’t forget that we operate under the self-assessment regime

In some ways that makes it worse, in that you won’t know if you have a problem until you get audited. And by then there could be a few years worth of unpaid taxes, interest, and penalties to be lumped with if you do.

Unless of course you get a private ruling in advance.

But then, I could also just be worrying too much… [].

Anyway, thanks again. I’ll see what my paid advice finally comes up with.

Cheers,
GP

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January 26, 2005 - 6:50 am

Originally posted by betterbiz:

YOU have invested in income units which (ordinarily, depending on the Deed) do not attract any sharing of capital gains.

Yes, the deed allows income-only units with no right to capital gain.

The purpose test (for deductibility of the interest) is applied against you, NOT the trust.

That makes sense.

Whether the HDT uses it for income generating purposes or not is (almost) irrelevant

That, I think, is the prime question here (and with the Div7a issue). How little income back to the unit holder (relative to the amount of CG going elsewhere discretionally) might make the ATO question whether or not your main intention in buying the units was to generate an income stream for yourself (or the company in the latter case)?

it is the COMPANY investing in the income units

Yes, in its own name.

Because there has been no loan to you which might otherwise be contrued, or deemed (under DIV7) to be a dividend to you.

Hopefully that would be the case, but reading through some of the subdivision stuff there it seems that 109C basically says any payment from the company to a shareholder or related trust causes a dividend unless exempted by one of the other clauses, the only one of which I can see being relevant being 109J about discharging pecuniary obligations – since it has to pay for the units it bought.

But then I wonder about the arms-length transaction thing, and whether it could be argued that a company in the normal course of business would not enter into such a transaction.

then paying a fully franked dividend to a low income shareholder

Unfortunately I’m the only real shareholder and am on the top tax rate, which is why I’m having all this hassle in the first place [].

Thanks a lot for your detailed response! Much appreciated.

And sorry to the original poster for causing a temporary deviation in the subject of this thread.

Cheers,
GP

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January 26, 2005 - 2:40 am

Originally posted by betterbiz:

One’s intent at the start of doing something IS VERY IMPORTANT in tax land … If nothing else it’s often the cornerstone for arguing for/against the application of Part IVA of the Tax Act

One thing I’d be interested in your view on, since you have a tax practice, is something Julia brought up on Somersoft.

Are you familiar with hybrid discretionary trusts, and the personal borrowing of money to buy income units in the trust for investing and then claiming the interest as a personal tax deduction?

Her point there was essentially if capital gains from trust investments were being distributed discretionally rather than back to the unit holder, could the ATO perhaps try and argue that not all of the interest should be deductible since effectively it’s not entirely being used to earn an income for the borrower (in that some of the gains are being discretionally distributed elsewhere)? Specifically she was asking if anyone doing this had been audited to test it.

I’m looking at a similar issue with div7a, where I have funds in a company and want it to buy income units in an HDT with capital gains in the trust being distributed elsewhere (no borrowings though). I’m wondering whether similar to above, the ATO could argue that for the percentage of total returns being distributed elsewhere as capital gains, that percentage of the company funds would fall under div7a since they’re effectively being used to generate returns for individuals rather than the company – even though the company would still receive all trust income as the units entitled it to.

I am getting professional advice on this, but I’d still be interested in your opinion.

Cheers,
GP

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January 25, 2005 - 8:08 am

Jo,

But LAND is not CGT exempt UNLESS you build your PPOR on it.

Not talking about it being exempt from anything. Just saying the gains made on sale may be considered income rather than CG.

it will still be liable for CGT at 100% rate (<12 months) or 50% (>12months) discounted rate

Not if it’s classed as a business development (ie. bought with the intention of improving it and then selling it for a profit) rather than an investment. In that case the gain would just be considered income, with no 50% discount available.

It’s the same with share trading. If you do it as a business there’s no capital gain. Everything is income.

The only real advantage of that is if you make a loss, then it can be offset against other income.

how would he argue this “intent”???

With property I don’t know. With shares, there are a number of things the ATO can take into consideration, but the underlying thing is the intent. As with many ATO things though, if your intent gives you a tax advantage, they may try and tell you what you really intended and force you to prove them wrong. [baaa]

why would you not want to claim any profit of sale as CG

Mostly you would, unless you made a loss in which case it might be better as income.

However, circumstances may not give you a choice. A bit hard to say your intention is buy and hold when you’re turning over a dozen a year [biggrin]

In the case of a one-off though, yes I agree it may be difficult for either party to prove the intention one way or the other. Unfortunately the ATO has the upper hand there, in that they can say what they like and the onus of proof is on you.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 25, 2005 - 3:18 am

Perhaps there was a full moon that night also!!!

What… two full moons about four weeks apart?????

Wow… what are the chances of that…

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 25, 2005 - 3:13 am

Jo,

He’s not saying there’s no tax on the gains at sale, just that those gains would be treated as income for tax purposes not capital gain.

Thus no 50% discount.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 24, 2005 - 1:37 pm

As well as ING, take a look at BankWest:

http://www.abetterdeal.com.au

Essentially identical to ING but with 6% for the first 12 months, after which it reverts to 5.25% the same as ING.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 24, 2005 - 1:24 pm

Scrim = wooden wall where wall paper is placed over.

Scrim is a woven fabric backing placed between the wall and the wallpaper.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 24, 2005 - 1:05 pm

Another trust specialist in Sydney with a knowledge of hybrid trusts is Nick Moustacas at:

http://www.strategicwealth.com.au

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 5, 2005 - 11:08 am

It wouldn’t normally be a good idea to have a company own the assets as you’d lose the 50% CGT discount.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 5, 2005 - 11:05 am

Rob,

One question: where the line says “Director Loans” between the sole director and the trust, would that be from the director’s personal funds or from the trading (or trustee) company funds?

If the director is lending company funds to the trust, I think it would have to be at the ATO-approved interest rate to avoid the Div7a provisions (ie. having the money declared as a dividend to the shareholder).

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

January 5, 2005 - 10:53 am

I would guess because if the trust (trustee) got sued for some reason, all the assets of that trust would be at risk. However, assets of other trusts, even if controlled by the same trustee, would be safe.

Too many trusts though would mean too much overhead in operating them, so the value at which a new trust would be started would be a trade off between the gain in asset protection and the cost of operation.

That’s my thought anyway…

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

December 27, 2004 - 3:27 pm

Alex,

Originally posted by alexlee:

‘When the Crash Comes’

You mean “The Day the Bubble Bursts”, or does he have another b00k like that too?

I read the bubble b00k and thought it was a good read. He’s an entertaining writer.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

December 27, 2004 - 3:20 pm

Originally posted by Julia:

Another very important consideration is not being able to distribute losses to beneficiaries. This goes against trust and pro individuals.

Also pro hybrid discretionary trusts.

GP

[GreatPigMember@greatpigJoin Date: 2004Post Count: 284]

December 27, 2004 - 3:13 pm

Obiwan,

For some general info, have a look at some of the links on this page:

http://www.asx.com.au/markets/LMIs_AM2.shtm

GP