Hi all,
I need some advice from those of you who have experience with Hybrid Trusts. I’ve just finished reading ‘Trust Magic’ and spoken to my accountant about setting one up. We are both just a bit uncertain about what happens when the Hybrid trust reverts to being a normal discretionary trust.
If you take the following example :-
I borrow 100K, which I use to buy 100 units @ 1K each in the hybrid trust. The trust then buys an IP for 100K.
5 years later, the IP is worth 200K. The trust borrows money to buy the units back from me, and then becomes a discretionary trust. However, the amount that the trust must borrow is where we are a little unclear.
I was under the impression that the units must be bought back for 100K, being the amount they were originally purchased for.
The accountant thinks that because the IP has appreciated, the unit price has appreciated, so the units must be bought back for 200K, leaving me with a 100K CG and pretty peeved.
Also, he wasn’t sure if this might be seen as a restructuring of the trust, leaving me liable for Stamp Duty and/or CGT.
I would greatly appreciate hearing from someone who has a hybrid trust and has been through this process how it all really works.
BTW I’ve fired off an email to Dale Gatherum-Goss and will let you know when he gets back to me.
Cheers
DiggerHey Digger, my first thought was to say – ask Dale.
My thoughts are as follows:
You have borrowed money to buy units in the trust. The trust pays you a varying return on this. It uses your funds to buy some assets, while still paying you a return. It then borrows the money, and pays back your loan. I didn’t think that the units would have gone up in value at all, so I don’t see any CG for yourself.
The trust can borrow as much as the bank will allow, so any leftover after paying you back would mean that it can then invest using its own money.
If your units have gone up in value in line with the assets, then there is no way that the trust will ever be able to pay you back – cos it won’t be able to 100% finance.
Definitely post back when you hear back from Dale, as I am unsure also now.
Cheers
MelHi Mel,
Dale got back to me (very quickly!!!) and explicitly stated that the units are redeemed at cost and not market value. Additionally, no stamp duty or CG is applicable either. I hear what you’re saying about 100% refinancing and that makes perfect sense to me also.
However, ‘perfect sense’ and the ATO don’t always go hand in hand, so I was wondering if you (or anyone else) have put this into practice with the ATO breathing down your neck and what the outcome was.
Cheers
DiggerHey Digger, no I haven’t as yet – but if Dale said it, I’m more than happy to go with his advice
]Cheers
MelDigger,
I tend to agree with your accountant. Why don’t you apply for an ATO ruling on the matter. You will have a water tight answer in 28 days. The form is available on the ATO web site. You just need to describe the arrangement as you have here. They will ring you if they need more info.
There is too much money at stake. In investing you should eliminate all the risks you can.Julia
Hi Digger,
Sounds like the “refinancing” principle, where you can use the money the trust pays you for the units to go and buy a PPOR or holiday home (or just spend it all on a holiday!), and the interest on the loan is tax-deductible, because the trust borrowed the money to redeem its units.
The property is not located in WA is it? Because if it is, this strategy won’t work. The trust will cop full stamp duty (at the property conveyance rate!) on the market value of the units being bought back, which in most cases will negate the income tax benefits, or even put you in a worse position.
Getting an ATO ruling is a great idea. The trouble with doing tricky things with trusts is that it usually raises a red flag with the ATO. This significantly increases your risk of being investigated or even audited. A binding private ruling will help make things kosher.
Cheers
Elysium-MDIY Residential Property Settlements in WA – the book coming soon! When I can get my act together…
Thanks for the advice, guys. I had suggested an ATO ruling to the accountant but he suggested we leave that as a last resort. He seems a bit wary of approaching the ATO, so he’s going to find out some more info over the next fortnight. I can see his point, but then again, once you have a ruling (one way or the other) you know exactly where you stand. Anyway, I’ll post here when he get’s back to me.
Elysium, the IP is not in WA, but good to know other states may treat trusts differently. Looks like I need to do a bit more homework on that!
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