What’s wrong with Hybrid Trust for Property Investment?
I have been told that banks and ATO don’t favour Hybrid Trust.But, WHY ??
What’s the real reason behind it, and why they treat this differently than discretionary or unit trust?
Any savvy accountant or Hybrid Trust guru can comment on this??
ATO dont like it because you can use it to get a loss making tax deduction during the income phase and when you sell the gain might go to the lowest path and they say that the purpose of an investment should be to make money and the link needs to be clear for taxation. Dale Gatherum Goss wrote a good paper on the m and said to think twice about getting into one.
Look on the ATO site under private rulings and read it for yourself its quite specific and it disallows interest dedutability. Phone them up and have a talk to them they are quite helpful.
ANZ and ST George have no problem with them from a lending point of view.
I bought one and ditched it as I didn't want to settle properties into a structure that may not allow full interest deductability either now or in the future. When I challenged my accountant that sold me it she said that there is the risk that the interest may not be fully deductible to me and their lawyers were working on a new deed that was three times the price and it would have its own ruling.
The ATO tell you that a ruling only applies to you and that you have to get one specific to yourself balnket rulings aint to be relied upon.
I ended up using a unit trust instead.
Plenty of people still using Hybrids and they dont see any problems with them
There is nothing wrong with Hybrids if they are set up properly.
In the past they were set up like this:
Discretionary portion and Unit portion. The unit holder borrowed money to buy his units. He claimed the interest against his income. But because he was the highest income earner, the trustee distributed income from the trust to other beneficiaries on lower tax rates. The ATO came along and said, this guy is claiming all the interest, but not getting any income. So there is no commercial justification to claim the interest. Later on if the property was sold, the trustee also had discretion to distribute the gain to other beneficiaries too – ie beside the unit holder.So to get around this the deeds have been reworded (or the good ones), so that the trustee has no discretion while units are issued. That is, the income and the gain (or part of the gain) must go to the unit holder. But this has reduced some of the attractiveness of the HDT. Units are property and in the event of bankruptcy, they can fall into the hands of creditors – which is not good as they will get their hands on your income. Also if the place is sold, then the CGT must go to the unit holder, who is usually the highest income earner.
But I think this is still better than holding a property in your own name for a few reasons.
1) the units can be redeemed by the trust and it can operate as a discretionary trust. This can be done without stamp duty, but CGT would be payable on the gain in the units. This may be able to be minimised by transferring units gradually.2) The refinancing principle. The trust can borrow to buy the units thus releasing funds to the owner of the units who can then pay down personal debt. The trust should be able to borrow to buy back the units (income producing). So you are really able to claim the interest on personal borrowings.
3) In some states you may be able to transfer the property to your SMSF without the need to pay stamp duty.
Why Banks don't like them:
Usually the bank will only lend money to the owner of the property. With trusts the legal owner is the trustee. So if you have a company as a trustee, then the company name is own title. But for the negative gearing effect to work, the interest needs to be claimed by the highest income earner (bigger deductions). So it is usually the highest income earner who borrows to buy the units in the trust. That means the loan will need to be in their personal name, with the property owned by the company. Many banks do not like this – they call it 3rd party lending, or lending to someone who is not the owner.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
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