can i do this

[Georges]

hi

i bought a property with Hybrid Trust 2 years ago. Now the IP gone up in value a bit, can I withdraw the equity as a LOC, then the trust pay me back for the units I own, and I use that money to buy my own PPOR? This way, that sum of money is tax deductible....

 

[dan c]

There are a lot of variables in this situation. Have the units gone up in value, and would you have to pay CGT on the sale of these units? It sounds ok in theory, but there maybe some hiddene costs to you if the trust buys back some of your units. Best to check with a taxation / legal advisor.

 

[bene313]

Have the units gone up in value, and would you have to pay CGT on the sale of these units?

If the property has appreciated, then the units will have too as their value is based on the assets in the trust. So yes you have a capital gain if the trustee claws back units.

 

[bene313]

One issue I don't recall being cleared up here is the possibility of double taxation of capital gains.

Eg. Georges buys property for 300k with special income units. IP goes to 400k and Georges units are redeemed by the trustee. Taxable gain is 400k-300k = 100k.

The IP is now held in the trust with the trustee's discretion to income distributions (no units on issue).

Later the trust sells the IP for 500k. The cost base is 300k. Taxable gain is 200k and must be distributed to beneficiaries.

The total gain is 500-300k = 200k. However total tax is paid on 100+200k = 300k.

 

[Rob G.]

hi

i bought a property with Hybrid Trust 2 years ago. Now the IP gone up in value a bit, can I withdraw the equity as a LOC, then the trust pay me back for the units I own, and I use that money to buy my own PPOR? This way, that sum of money is tax deductible....

Are you asking if the borrowing by the trust to redeem your units is tax deductible ?

This is known as the refinance principle, TR 2005/12.

It is also subject to Part IVA tax avoidance issues.

Cheers,

Rob

 

[Georges]

I was thinking, my trust takes up a loan on the additional equity, and repay me the money i lent it. So isn't it like loan repayment to me?

Why do i have to pay cgt.....

 

[bene313]

But if it's an HDT you purchased units in the trust right? You haven't actually lent it any money.

If you sell those units back to the trust (what you are proposing) it's a CGT event.

Give your accountant a buzz.

 

[Terryw]

Are you asking if the borrowing by the trust to redeem your units is tax deductible ?

This is known as the refinance principle, TR 2005/12.

It is also subject to Part IVA tax avoidance issues.

Cheers,

Rob

Hello Rob

Would it be the refinancing principle at work here?

The trustee would be borrowing to purchase units, not borrowing to make a distribution to a beneficiary.

 

[Georges]

Hi

If i bought units worth $200,000 from my hybrid trust, and after some time the property goes up to $300,000, you mean when the trust buys back my units i will have to pay CGT on $100,000 profit?

So meaning the trust should only take my units back when I'm on a low tax bracket?


So in this sense there is no CGT benefit from hybrid trust....

 

[Terryw]

Your trustee should buy back your units at market rates - probably $300,000 in this case. So that will leave you with a capital gain of $100,000.

Not only that, but I beleive the trust would have to pay CGT if it sold the property. So essentially CGT would be paid twice.

 

[rodimus]

Are you sure Terryw? Didn't know that one before. If it is true, then probably hybrid trust is a bad investment vehicle.

 

[Rob G.]

Hello Rob

Would it be the refinancing principle at work here?

The trustee would be borrowing to purchase units, not borrowing to make a distribution to a beneficiary.

Hi Terry,

There is no definition of redemption of units in ITAA97, and is not really well covered in trust law.

The trustee does not acquire units because they are cancelled.

The concept of borrowing to repay contributed capital was covered in FCT v Roberts & Smith for a (common law) partnership.

Here the "capital" definition is not equity, but actual amounts contributed by the partners intending to not be returnable except by unanimous agreement, plus undrawn profit distributions, plus any advancements by the partners.

TR2005/12 relating to trusts talks about "returnable amounts" which again covers amounts contributed by beneficiaries, plus unpaid present entitlements and any loans by the beneficiairies.

Where such trust "returnable amounts" can be traced to actual use in generating trust assessable income then if the trustee borrows to return these amounts (i.e. pay a distribution) the interest is deductible.

Note here the "distribution" is a "return of capital" whether it involves surrender of the unit or not. See TR2005/12 example 2. Capital is returned and a proportionate number of units are cancelled.

Note that merely borrowing to make a distribution in respect of an unrealised capital gain is NOT deductible.

So it is the original contributed amount that is counted ... and this may well be different to the (unindexed) cost base !!!

Cheers,

Rob

 

[Terryw]

hi Rodimus

No, I am not entirely sure about that, but I have heard it said a few times.

Maybe someone else could confirm?

 

[Terryw]

Thanks Rob - another complex area of tax.

 

[Rob G.]

Are you sure Terryw? Didn't know that one before. If it is true, then probably hybrid trust is a bad investment vehicle.

You need to perform a discounted cash flow analysis to see if your personal interest deductions on borrowings to purchase the units exceeds the cost of both you and the trustee paying (discount) CGT for the same capital gain on a deferred basis.

Cheers,

Rob