All Topics / Legal & Accounting / Questions about Hybrid Trusts

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  • Profile photo of tlnsrqtlnsrq
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    @tlnsrq
    Join Date: 2005
    Post Count: 3

    I am considering setting up a Hybrid Trust with for the purpose of investing in Shares and in the property market.

    The reason I am considering setting a Hybrid Trust is because I want to borrow money to invest, be able to claim the interest back on my personal tax return (I am on high tax bracket) and finally be able to distribute capital gains to low income beneficiaries.

    I have the following questions and I appreciate if somebody with the appropriate knowledge provide me with some answers:

    1- Is it worth considering a Hybrid Trust for the purpose of investing in shares?

    2- If I borrow money (100K) to buy units in the Hybrid trust (100 units) and the money is invested in property or shares, then ALL income produced have to be distributed back to me. Can somebody confirm that?

    3- What happen when the value of the investment increase (say become 200K), will ALL income be distributed back to me as the units holder or can I distribute back only part of the income to myself which is proportianl to the original value of the units 100K? I have read some opinions that say that this is achievable so that the rest of the income can be distributed to low income beneficiaries.

    4-When the investment is sold will capital gain be distributed to me (units holder) or can it be distributed to other low income beneficiaries.

    5- what happen when the investment become positive geared, (income exceed interest). How can I divert the excess income to other low income beneficiaries instead of having it directed to me as the unit holder.

    6- When and how the actual income units get created, is it when I purchase an investment or is it at tax return time.

    7- Can I have overseas non resident relatives as beneficiaries and what would be the tax treatment then, as in how much witholding tax should the trust pay.

    8- For the type of investment I want to do, shares and property, is there any value of having a company as a trustee as opposed to me as a trustee

    9- If I setup the trust with me as a trustee and appointer initially, can I change the trustee later to a company. Should the company have to be created BEFORE the trust has been setup or can the company be created after the trust has been setup and then have it appointed as a trustee?

    10- Should I move the family home to the trust from an estate planning perspective or is there some other structure that is better.

    11- FInally does anybody have recommendations for an accountant in Sydney that can setup and maintain this structure.

    I know this is long list of questions but this matter is quite complex and I have been talking to a number of accountants (3) but it seems not all accountants are familiar with hybrid trusts so I resorted to do my own research.

    Any help is greately appreciated

    Cheers

    Antonio

    Profile photo of nazzysmithnazzysmith
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    @nazzysmith
    Join Date: 2005
    Post Count: 102

    Hi Antonio,
    By moving your family home out of your name and into a trust, you are effectively selling it to the trust, you would have to pay stamp duty again making it quite expensive, its not reccomended.
    Can I suggest getting Wealth Guardian from this site. I found it a tad expensive, however if your like me Education is priceless and I really did learn alot. Personally I knew nothing about stucturing or trusts beforehand. Now I have an understanding of how I want to structure my investments to ensure asset protection and tax saving And the pro’s and cons of different set ups.
    Although I am still relying on a good accountant to help me finalize these details.
    Fyi I intend to utilise a discretionary trust. Will reply in there near future after I have finalized.

    Profile photo of catacata
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    @cata
    Join Date: 2005
    Post Count: 559
    Originally posted by tlnsrq:

    I

    1- Is it worth considering a Hybrid Trust for the purpose of investing in shares?

    Yes

    2- If I borrow money (100K) to buy units in the Hybrid trust (100 units) and the money is invested in property or shares, then ALL income produced have to be distributed back to me. Can somebody confirm that?

    At the absolute discretion of the trustee

    3- What happen when the value of the investment increase (say become 200K), will ALL income be distributed back to me as the units holder or can I distribute back only part of the income to myself which is proportianl to the original value of the units 100K? I have read some opinions that say that this is achievable so that the rest of the income can be distributed to low income beneficiaries.

    At the absolute discretion of the trustee

    4-When the investment is sold will capital gain be distributed to me (units holder) or can it be distributed to other low income beneficiaries.

    At the absolute discretion of the trustee

    5- what happen when the investment become positive geared, (income exceed interest). How can I divert the excess income to other low income beneficiaries instead of having it directed to me as the unit holder.

    At the absolute discretion of the trustee

    6- When and how the actual income units get created, is it when I purchase an investment or is it at tax return time.

    A minute entry for most deeds

    7- Can I have overseas non resident relatives as beneficiaries and what would be the tax treatment then, as in how much witholding tax should the trust pay.

    Trust pays no tax, beneficiaries pay tax where they are residents

    8- For the type of investment I want to do, shares and property, is there any value of having a company as a trustee as opposed to me as a trustee

    Yes Yes Yes

    9- If I setup the trust with me as a trustee and appointer initially, can I change the trustee later to a company.

    Yes

    Should the company have to be created BEFORE the trust has been setup or can the company be created after the trust has been setup and then have it appointed as a trustee?

    Better to do it at the same time

    10- Should I move the family home to the trust from an estate planning perspective or is there some other structure that is better.

    No, there is better options available

    11- FInally does anybody have recommendations for an accountant in Sydney that can setup and maintain this structure.

    Not that I know of.

    I hope this helps

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of Mortgage HunterMortgage Hunter
    Participant
    @mortgage-hunter
    Join Date: 2003
    Post Count: 3,781

    http://www.strategicwealthmanagement.com.au

    Will set up and run trusts and are located in Sydney – also have a great reputation.

    Cheers,

    Simon Macks
    Residential and Commercial Finance Broker
    ***NODOC @ 7.15% to 70% LVR***
    [email protected]
    0425 228 985

    Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.

    Profile photo of tlnsrqtlnsrq
    Member
    @tlnsrq
    Join Date: 2005
    Post Count: 3
    Quote:
    Originally posted by Cata:

    Quote:
    Originally posted by tlnsrq:

    I

    2- If I borrow money (100K) to buy units in the Hybrid trust (100 units) and the money is invested in property or shares, then ALL income produced have to be distributed back to me. Can somebody confirm that?

    At the absolute discretion of the trustee

    3- What happen when the value of the investment increase (say become 200K), will ALL income be distributed back to me as the units holder or can I distribute back only part of the income to myself which is proportianl to the original value of the units 100K? I have read some opinions that say that this is achievable so that the rest of the income can be distributed to low income beneficiaries.

    At the absolute discretion of the trustee

    Does that mean that as a trustee I can divert the income to a non unit holder? would I still be allowed to claim the interest back on my tax return (as a unit holder?)

    Profile photo of tlnsrqtlnsrq
    Member
    @tlnsrq
    Join Date: 2005
    Post Count: 3
    Originally posted by Cata:

    Originally posted by tlnsrq:

    I

    1- Is it worth considering a Hybrid Trust for the purpose of investing in shares?

    Yes

    2- If I borrow money (100K) to buy units in the Hybrid trust (100 units) and the money is invested in property or shares, then ALL income produced have to be distributed back to me. Can somebody confirm that?

    At the absolute discretion of the trustee

    3- What happen when the value of the investment increase (say become 200K), will ALL income be distributed back to me as the units holder or can I distribute back only part of the income to myself which is proportianl to the original value of the units 100K? I have read some opinions that say that this is achievable so that the rest of the income can be distributed to low income beneficiaries.

    At the absolute discretion of the trustee

    4-When the investment is sold will capital gain be distributed to me (units holder) or can it be distributed to other low income beneficiaries.

    At the absolute discretion of the trustee

    5- what happen when the investment become positive geared, (income exceed interest). How can I divert the excess income to other low income beneficiaries instead of having it directed to me as the unit holder.

    At the absolute discretion of the trustee

    6- When and how the actual income units get created, is it when I purchase an investment or is it at tax return time.

    A minute entry for most deeds

    7- Can I have overseas non resident relatives as beneficiaries and what would be the tax treatment then, as in how much witholding tax should the trust pay.

    Trust pays no tax, beneficiaries pay tax where they are residents

    8- For the type of investment I want to do, shares and property, is there any value of having a company as a trustee as opposed to me as a trustee

    Yes Yes Yes

    9- If I setup the trust with me as a trustee and appointer initially, can I change the trustee later to a company.

    Yes

    Should the company have to be created BEFORE the trust has been setup or can the company be created after the trust has been setup and then have it appointed as a trustee?

    Better to do it at the same time

    10- Should I move the family home to the trust from an estate planning perspective or is there some other structure that is better.

    No, there is better options available

    11- FInally does anybody have recommendations for an accountant in Sydney that can setup and maintain this structure.

    Not that I know of.

    I hope this helps

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of catacata
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    @cata
    Join Date: 2005
    Post Count: 559

    Does that mean that as a trustee I can divert the income to a non unit holder?

    The trust deeds that I use, Yes if the trustee wants to. You will have to check the deed of the trust you purchase as some differ.

    would I still be allowed to claim the interest back on my tax return (as a unit holder?)

    This comes back to what the money is used for. In your case, you invested in hybrid trust units, so yes. What the trust uses the money for is up to the trustee, not you(for your tax return)

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of tom1000000tom1000000
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    @tom1000000
    Join Date: 2003
    Post Count: 74

    Cata,

    Thank you for answering the questions provided. However, could you possibly please provide some reasons behind the answers?

    Eg it is apparently better to have a company as a trustee, not yourself…. why is this so?

    Thanks

    Profile photo of tonyy21692tonyy21692
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    @tonyy21692
    Join Date: 2003
    Post Count: 128

    Hi Antonio

    Take care with distributions to non residents as the amount of withholding tax depends on
    1) the type of income distributed (ie interest/dividends) and
    2)the beneficiaries (tax) residency

    Also, don’t forget imputation credits are wasted on non resident beneficiaries.

    Regards
    Tony

    Profile photo of catacata
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    @cata
    Join Date: 2005
    Post Count: 559
    Originally posted by tom1000000:

    Eg it is apparently better to have a company as a trustee, not yourself…. why is this so?

    If a trust is controlled by a person as a trustee, even though that person does not own any part of the trust, if any lawsuits are taken out, The trustee(ie you) can be held accountable for the actoins of the trust and could be sued.

    To get arround this problem, a $2 company is appointed trustee of the trust. Because the trustee company is a $2 company it is of little use to the litigants to sue the company. You are appointer Director of the trustee company. Therefor, in effect, you control the asset in the trust BUT DO NOT OWN THEM. All you own in this case is the $2 company.

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of kpkp
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    @kp
    Join Date: 2004
    Post Count: 509
    Originally posted by Cata:

    Does that mean that as a trustee I can divert the income to a non unit holder?

    The trust deeds that I use, Yes if the trustee wants to. You will have to check the deed of the trust you purchase as some differ.

    would I still be allowed to claim the interest back on my tax return (as a unit holder?)

    This comes back to what the money is used for. In your case, you invested in hybrid trust units, so yes. What the trust uses the money for is up to the trustee, not you(for your tax return)
    CATA
    Asset Protection Specialist
    [email protected]

    Surely the ATO would take a dim view to you claiming a tax dedn for interest paid on borrowings used to purchase units in a trust and then not have the trust distribute ANY income back to you ???
    Especially if the trust generated an income…and distributed it elsewhere.

    kp

    Profile photo of catacata
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    @cata
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    As far as I am aware there is no problem, provided the resultant distributions do not
    breach the Rule against Perpetuities.

    The rule against perpetuities is a rule against remoteness of vesting. If the rule is breached the distribution would fail.

    The rule against perpetuities is a very complicated area of law.

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of tonyy21692tonyy21692
    Member
    @tonyy21692
    Join Date: 2003
    Post Count: 128

    Hi KP

    The best way to get some certainty in these types of tax arrangements is to get a private ruling from the ATO prior to entering the transaction.

    Otherwise, when clients ask me for watertight quarantees. I let them know, “if the ATO take a dim view then you only thing you have to rely on is an argument. And thats all it is, an argument”.

    Regards
    Tony

    Profile photo of mummum
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    @mum
    Join Date: 2004
    Post Count: 104

    Take care with distributions to non residents as the amount of withholding tax depends on
    1) the type of income distributed (ie interest/dividends) and
    2)the beneficiaries (tax) residency

    Also, don’t forget imputation credits are wasted on non resident beneficiaries.

    Can’t the trustee distribute interest income and unfranked dividends only to non-residents? You have to pay withholding tax to non-resident beneficiaries. But you can keep the franking credits for Aus beneficiaries by paying franked dividends only to Aus beneficiaries?

    Profile photo of TerrywTerryw
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    From my knowledge:

    1) Yes
    2) Trustee would have discretion, but to claim a deduction you would have to show that you were investing money with a few of getting an income. If you are not getting any distributions, then the purpose of your investment is in doubt. Not sure if all the mone would have to go to the unit holder though.
    3) Not sure
    4) Not sure, but the units could possibly be redeemed before the sale, and then the gain could be distributed to any beneficiary
    5) Trust could redeem the units, and it would then be a discretionary trust with income being distributed as trustee see fit.
    6) Units need to be created at purchase. You will be borrowing money to buy these units.
    7) I’ve heard overseas residents pay something like 30%+ tax with no tax free thresholds. A quick check with the ATO site should reveal.
    8) If just buying shares, then no. Shares are not risky in the sense of the owner being sued, but various things can go wrong with a property and the owner could be sued. (eg. tenant dies from faulty electrical wiring which you hooked up)
    9) The trustee can be changed, and I beleive the company could be setup later. But this will require loans to be amended, and title deeds changed etc – nominal fees.
    10) Your home is your only CGT free asset. Better to keep in in your name I think.
    11) For a good accountant based near Sydney, I would recommend Coastymike of this forum. Mike is in Gosford.

    Terryw
    Discover Home Loans
    Parramatta
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    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of catacata
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    8) If just buying shares, then no. Shares are not risky in the sense of the owner being sued,

    I have hear of it being done sucessfully terry. People can be sue happy.

    CATA
    Asset Protection Specialist
    [email protected]

    Profile photo of TerrywTerryw
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    Cata

    I meant if you owned, say Telstra, shares only. There would be no way the trustee could be sued if their capacity as trustee. However, they could be sued as an individual for other reasons.

    Terryw
    Discover Home Loans
    Parramatta
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    Sign up to my mailing list.
    Just send me a blank email, with “subscribe” in subject line.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of coastymikecoastymike
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    1. Very important to understand the responsibilities of properly managing a HDT. Also be cognisant of the advantages and disadvantages of operating through a HDT.

    2. If you purchase all the income units then YES the TOTAL income should be returned to you. Although most trust deeds will allow distribution of income to other beneficiaries when special income units have been purchased and some of the income is distributed to another individual other than the income unit holder you will have interest deductibility issues based on Munro V FCT and Phillips V FCT.

    3. May want to consider borrowing in the trust name, redeeming some of the special income units, using the refinancing principle and then distributing some income to other beneficiaries. Must be done properly and well documented.

    4. Depends on the trust deed. Trust deed should allow distributions of capital to a wide range of beneficiaries.

    5. Redeem units, apply refinancing principle, and then distribute according to the trust deed rules.

    6. Income units can be issued at any time. Discuss with your accountant re acquisition and/or redemption of special income units.

    7. Discuss with your accountant.

    8. Need to discuss with your accountant asset protection. Corporate trustee still has a right to be indemnified against the assets of the trust. Essential to make sure business assets are held in a different structure to investment assets. Low risk investment assets generally are OK to have a low risk individual as trustee. Corporate trustee can be an overkill.

    9. Generally better to keep family home in low risk individual name. Transfer to another party (.e.g trust) will result in stamp duty, land tax and loss of main residence exemption. Need to weigh up pros and cons.

    10. Would love to help.

    Cheers

    Mike

    Profile photo of coastymikecoastymike
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    Cata just to clarify from reading your post almost seems to indicate that if you run your business through a trust and the trust (and assume the trust holds asset) then a corporate trustee will provide total asset protection.

    This is not the case as under State’s legislation a trustee has the right to be indemnified out of the assets of the trust if the assets of the trustee are insufficient to meets its obligations to the creditors.

    Ive heard of some people claiming that because the company is a $2 company then that is the only assets available to the creditors. This is not correct as it ignores the RIGHT TO BE INDEMNIFIED FROM THE TRUST ASSETS.

    A good reason for having separate trusts for your business tangible assets and leasing them to your business trading trust.

    Profile photo of catacata
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    @cata
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    Hi Coasty
    You seem to have misunderstood what I meant. I am well awear that the trusts assets can still be taken.

    I also ust 2 seperate trusts for business, if the have enough assets to worry about. If not I like to keep costs down for my clients(different situations).

    I hope this clears he water for you.

    CATA
    Asset Protection Specialist
    [email protected]

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