I’ve just started a Hybrid Discretionary Trust a few months back for the purpose of buying IP.
I heard someone mansion that it’s best to ask for a private ruling from the ATO regarding the working of Hybrid Discretionary Trusts.
I’m not exactly sure what the private ruling should have in it. Here are some of my questions that I have on this issue:
1) My understanding is that if you get a private ruling from the ATO, then if the rules change some time in the future, then your private ruling will override those ATO changes. Is this correct?
2) Should I apply for a private ruling from the ATO, when quite a few people seem to have a Hybrid Discretionary Trust?
3) What do I actually say in the application for the private ruling? Do I just send them my deed and ask them if this is fine according to the ATO? Or do I concentrate on some aspect of the deed? I guess the main reason that I got this trust is because it allowed me to buy a property in the Trust and negative gear it by buying units from the trust. Then later on when the property becomes positively geared, the trust buys back the units and starts working like a normal discretionary trust.
4) Has anyone on the Forum applied for a private ruling themselves on this issue? And if so, what did they put in the application? Example would be great here [
]All Comments are welcome.
Kind regards,
Orion
Orion,
There is a ruling form on the ATO Web site. The area you need to apply for the ruling on is the acceptabilty of the arrangement you discuss in point 3)
FOr example being allowed to negative gear the loan for the Units when you are unlikely to earn significant income from them because the Hybrid trust will re direct it.The ruling wll be binding on the ATO unless the law changes.
Julia
I have friends in the ATO and they have informerly informed me that applying for a private ruling is like waving a red flag at a bull!
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Better to know the colour of the flag before you start out. How long would you intend to hold an investent property. Considering transaction costs I assume many years. Do you feel that lucky.
Julia
Orion
i have successfully applied for an ATO ruling in the past for a client. No problem with the interest deductibility.
Their biggest concern was whether the tenant was at arms length. ie not a related party.
bear in mind that all trust deeds are different and i was confident of a positive result before applying as the principals and ATO rulings supported my case.nickM
Everyone,
Please let me be the first to welcome NickM to the forum [
]Nick is a fantastic accountant operating in Sydney yet with clients all over. He is particularly experienced with property investors and also an expert on the different trusts investors use.
You won’t go wrong following his advice.
Welcome Nick.
Cheers,
Simon Macks
Mortgage Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi Orion,
Could you tell me how much to set up a hybird trust, & the annula running costs? How can you assess the that trust is workable or very suitable for your need?Regards
Julian []THERE IS ALWAYS A BETTER WAY!
Julian,
The setting up of the trust cost me about $1000 (see http://www.chrisbatten.com.au). Since my original purchase, I’ve seen someone indicate that the trust should cost about $500, but I’ve never followed up who would sets it up.
In addition, you need to pay about $200 for the stamp duty. The cost of the trust that I’ve indicated, is only if a person is the Trustee for that trust. If you want a company to be the trustee for the trust (this is the better way to do it, as if offers much better asset protection) then you will also need to set up a company which costs just under $1000. The company setup costs quite standard.
I haven’t gone over the FY with my trust as yet, but I assume that the tax return costs will be similar to what I pay for my company costs (Note I’ve got a very simple Company because I’m self employed). This means that it will be about $200 or there abouts.
Also the main difference between a Hybrid Trust and a normal Family trust is that with a Hybrid Trust you can negative gear your assets (property/shares) and in a Family trust you can’t.
Hope this helps you Julian. [
]Kind regards,
Orion
[8D]Hello all,
Thanks to all the people that have replied so far. From what I gather is that the ATO has no problem with the Hybrid Trust concept as long as the person who is living in the property which is being negatively geared is not a member of the Family who set up the Hybrid Trust in the first place.
This in fact confirms one part of the questions that I had just posted so I will not ask any further question regarding it in this post. See other post.
Furthermore, as TerryW said, don’t wave a red flag in front of the bull if you don’t need to so I don’t think I’ll be asking for a private ruling just yet. [
]Kind regards,
Orion
[8D]Hi Orion,
Thank you very much indeed.Julain [^]
THERE IS ALWAYS A BETTER WAY!
Originally posted by Orion:Hello all,
Thanks to all the people that have replied so far. From what I gather is that the ATO has no problem with the Hybrid Trust concept as long as the person who is living in the property which is being negatively geared is not a member of the Family who set up the Hybrid Trust in the first place.
Hang on a minute – wasn’t it you that held the gearing to but the units in the Hybrid Trust? or has the Hybrid Trust borrowed from someone else (as well as you) in order to buy the property?
In any event, if the tenant was related to you or your Trust (or even any beneficiary or unit holder of the Trust) then the taxman would look to see that the rental being charged (AND RECEIVED) was its fair market rental. When properties are rented within family structures they are sometimes rented for a lesser value or sometimes for no rent at all!!!
This would cause the problem with the acceptability of the whole ‘arrangement’ in the taxman’s eyes and therefore it’s tax effectiveness.
Furthermore, as TerryW said, don’t wave a red flag in front of the bull if you don’t need to so I don’t think I’ll be asking for a private ruling just yet. [
]Orion, that of course is your choice/right… however IF there is anything out of the ordinary with the Trust arrangement (and I’m not suggesting that there is from what I’ve read and hopefully understood) then you should perhaps reconsider your position.
That’s OK, Chris’s consulting rate for his members is fair… and even the higher rate for non-members could be money well spent too.[
]BetterBiz,
Sorry if I wasn’t too clear about my last reply.
I think you might be reading more in to my question then was originally intended. I have posted other questions recently that explain other aspects of my financial situation, but I was hoping to keep the questions separate and general in nature.
I’ll explain here my fuller situation so that there is no confusion.
I own a Hybrid Trust that has one negatively geared IP in it. This IP is negatively geared and I own the Special units from the Trust for the value of the IP.
I also own a house that I live in, which is outside the Trust. My plan is to have the house that I live in also in the Trust.
From various people and answers to this and other questions, I have concluded that it is possible to have the house that you occupy in the trust (and must pay the normal market rent) as long as you haven’t issued and own the units to that property.
This further confirms what you have said in your reply.
Hope this help. [
]Orion
[8D]I’ve just re-read the post and the responses and since it doesn’t appear to be mentioned anywhere I guess it begs the question – why would you want your family home in trust in the first place? – asset protection (from creditors) only?
Originally posted by betterbiz:I’ve just re-read the post and the responses and since it doesn’t appear to be mentioned anywhere I guess it begs the question – why would you want your family home in trust in the first place? – asset protection (from creditors) only?
Betterbiz,
There are two things that I’m trying to follow up on from verious discussions.
1) The ability of renting the family home. Which from various discussions/posts looks like you can; and
2) Soon, we’ll be moving to another house and this house will become an investment property and I want to orgonise everything for that transition.
Regards,
Orion
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