Hybrid Discretionary Trusts - whats the latest?

I purchased some properties in a HDT many years ago. It was an MGS deed, and I've had it updated to keep it up to date with the latest ATO rulings when there were all those issues with 'The Property Investor Trust' TM from Chan and Naylor. Mine was a good one thankfully!

So, whats the latest on these things?

I know they fell out of favour, but I've been using mine no problems, my new accountant has never mentioned any issue with them, I can still get loans from them (albeit less choice of banks) and as I understand they are fine to continue to use.

I was 'moving away' from it but I'm thinking I should just continue using it (it cost me enough!).

 

Personally I think the downsides outweighs the benefits, in large part due to the fact that if someone goes down this route they probably would have a pretty decent portfolio to justify it, and a pretty heavily negatively geared portfolio one too otherwise why bother with a potentially risky approach from a regulatory pov?

If they have a large portfolio pretty heavily negatively geared then choosing to have a structure that sigbificantly lessens your options for finance seems like madness to me


If someone has a business or any income generating side actuvity/part time business etc they can most of the positives of these hyvrid trusts which really is just having a trust structure but being able to use neg gearing to offset income and not have the hdt nonsense to deal with


Not a fan personally. Have actually had some personal experience with them going back to late 2000s


Above is just my general feel though and could be out of date if anything significant has changed

 

We've found issues in trying to income stream, income is only going to my husband though I am a low income earner, seems silly

 

As someone who worked as an adviser at MGS I have seen a lot of issues - good and bad with a number of different hybrid trusts and trusts which are actually hybrids but are called other names
( I found a fixed unit trust that was a hybrid trust)

Hybrid deeds if they are amended should pose little concern provided the discretionary element of the trust v's the special units is checked and allowed for. The mischief remains with changes to unitholders. MUST be redeemed, transferred (avoid !) or new units issued at market value and any proficient trust expert will know how the special accounting needs to be done for this. Get it wrong and double tax is a reality.

Important that the trust NOT own more than one property. If you dont understand the issue you need advice. If they cant explain why - you need a new adviser.

Lenders are anti hybrid trusts. Very small number of lenders who will touch one.

 

Why not change unitholders ? It may trigger CGT and duty but should be explored as sometimes can be exempt or be a affordable strategy. That is after all one of the benefits of a hybrid trust. The refinance principle may even give a major benefit and allow refreshed loans.

 

Latest is that interest can be deductible to unit holder if they are entitled to both income and capital while units on issue. To do this the unit holder has to borrow to acquire the units. The problem with finance is that the owner of the property is not the unit holder but the trustee so the mortgagor and borrower will be different.

 

Many lenders have a issue with the loan to the unitholder but allowing the trust property to be the loan security. Often the trustee gives a guarantee as well. Access to loan security using other property (ie own home) can avoid that issue.

A few lenders have strict policies that dont allow a person other than the trustee to borrow. While this works it means the trust incurs the interest and not the unitholder. This means neg gearing can fail and losses get caught in the trust. It also means access to equity later can be a problem.

That issue is one for a unit trust also. A broker will know which lenders are OK for this type of loan. Mention hybrid trust to some lenders and its a strict NO.