Hybrid Trust

Tom & Jerry have a hybrid trust which holds a property. The hybrid trust is setup with Tom holding 100% of the income units.

If the property is sold, does the distribution end up being income or capital? If capital, can the profits be distributed discretionary, eg. to Tom, Jerry or anyone else they wish?

 

You have to distribute according the the 100% ownership of the income units.
Not to anyone you wish.

 

The ATO views to hybrid trusts is that there are two elements to trust capital. A minor amount may be based on the settled sum ($10 example) with a larger proportion subject to units issued. Each trust must consider its register of unitholdings and the deed to determine how income is able to be distributed. The trustee cannot distribute solely to unitholders and this may render the distribution ineffective for tax purpose and subject to trustee taxation

The trust would make beneficiaries (unitholders AND through disc objects) entitled at year end to income of the trust estate that may include a CGT amount as well as other elements of trust net income. Once that is credited then the "value "of the trust is easily determined to be mere discharge of the unitholders through capital redemption but the capital may have no value beyond cost if its all completed correctly. No gain (or loss) should arise for redemption of units.

Experienced tax advisers may need to guide the correct process concerning trust unit redemptions so double taxation doesnt result.

 

you will need to read the deed

 

Income will generally be determined by tax law, ie You cant reclassify income as something it isnt. A hybrid trust will have exceptionally limited ability to distribute to "others". But I have also seen HDTs incorrectly setup where beyond initial units, no further issue of units occurred which vastly affects how the deed operates. eg Dave and Mabel may have put $400K each into the trust but in place of it being a issue of units its then a loan which affects how income is shared. Possibly even as a 100% discretionary object of the deed. This may affect the way income is distributed and definately is reason to consider the deed. It may be a fiction to now classify Dave and Mebls new funds as units being subscribed if the deed requires units be issued using a specific process. If that doesnt occur it may limit choice.

Hybrid trusts need competent advice on formation and thereafter.

 

I'm a bit confused about this. A property held by a hybrid trust for a number of years is sold, it will get treated as income rather than a capital gain and only get distributed to the owner of the income units?

In a hybrid trust, what is the discretionary element of the hybrid trust? Isn't a hybrid trust a mix between a discretionary & a unit trust providing extra flexibility?

 

Capital gains is income. Different to capital or corpus

but the deed could say anything

 

Look at your deed and who is on the beneficiary.
Example:
Tom has 50% of units holding.
Jerry has 50% of units holding.

Your Hybrid trust behaves like a unit trust.

 

Will take a look at the deed later when back home.

Is the below correct from this site, it's saying income can go to discretionary beneficiaries: Hybrid Trust | All Trust Structures

 

Income will include a net capital gain if one occurs. A CGT amount of income is not "capital".

The disc element is the sum settled for the discretionary objects of the trust. The issue of units creates a sum paid for trust units and the combination of these creates trust capital. The disc and fixed amounts determine the fixed or disc elements of income to all of the trust income and must generally be proportionately determined based on the deed and also the ATO views in its rulings. Reading the deed may only partially address that position. Unit subscription documnets may also be relevant. Many trusts permit different classes of special units to be issued with different rights. This can be problematic.

References include TR 2009/17 where addresses how a hybrid trust may incorrectly "benefit others"affecting some deductions. The ATO views in this ruling have broader appication that just interest. The rights of unitholders under the deed and the subscription may need to also be considered eg special units could exclude a right to a share of income or may limit income to that that doesnt include CGT amounts etc. This may affect proportionate calculations too.

Then also consider Part IVA. Past trust issues may also affect present trust issues. eg If interest deductions were incorrectly claimed in the past, or not.

Paul has an extensive background working for a firm in the area of hybrid trusts and the mechanisms to remedy ATO issues

 

quinn group is giving a example. it all depends on the wording of your deed. asking this forum wont give the answer until someone looks at your deed.

 

And loads of older HDT deed contain clauses of concern which "should" have been amended or the concerns bought to attention of the trustee so any offending clause isnt acted on. Amending isnt always required. eg Quinn mention redemption at "face value"...whatever that is. Some deeds or unit subscription rights may have allowed "cost based" redemption which was very common at the time which could pose a serious concern to how income is then distributed. It is Part IVA issue.

 

The trust deed says:

Then it lists any relative, spouse company, trust of the unit holder & additional persons, corporations, trusts whether born incorporated or formed before of after the date of this document.

Looks like income of the HDT could be distributed to anyone, any company or any trust, it doesn't have to go to the single unit holder named in the deed.

 

potentially. Did the unit holders claim interest on the loan?

 

No, they didn't.

What would happen if they did claim interest on the loan?

 

So your incurred interest on the loan. Your unit holders don't claim the interest from your home loan?
Example your $1,000,000 loan at 3% interest rate = $30,000 interest paid for the financial year.

So Tom doesn't claim that on his tax return?

 

Thats good as they would not be entitled to. The trust could claim the interest though - depending in the circumstances

 

I dont agree. That is merely one clause. A hybrid trust may or should have issued units which may also confer some form of fixed right. A HDT without unitholders may merely be a discretionary trust too. Reading such a single clause is dangeous and of dubious merits. If the unitholding doesnt have fixed rights I wouldnt want to be claiming interest as a unitholder and if a trust has issued units I would have some concerns if the trustee has borrowed. Interest may be completely or largely non-deductible. This was a trait of some old hybrid deeds before 2010. I know some unitholder rights are not contained in the deed but are contained in the application and the certificate and can be varied on issue.

Unitholders must have a fixed right to income to claim deductions for interest. Where that right is partial the deduction may be limited to the income. And that can affect all years and be a evasion or avoidance issue requiring amendment in the ATO view.

 

Correct, the trust is claiming the interest.

The initial unit holder was issued income units. The unit holder is not claiming any interest.

Talking about discretionary trusts, can the hybrid trust be converted to be a discretionary trust and if so, will there be any tax implications of this?

 

Yes it could be converted the trustee should seek legal advice on the cgt and stamp duty consequences but could be nil depending