Saturday, 10 December 2011

Hybrid Product Ruling


Hybrid Product Ruling


The ATO has issued a product ruling to Chan & Naylor Australia Pty Ltd, it is PR 2011/15. Before I launch into the details of this ruling the most important factor is that it only applies to trusts where units are issued between the 27th July, 2011 and 30th June 2014, so there is a very good chance it won’t apply to your particular circumstances.
If your units were issued before 27th July, 2011 the ruling is still a good premise from which to launch your own private ruling application but first read on. You may well find that the arrangement that the ATO approved in PR 2011/15 does not fit your circumstances at all.
The product ruling describes the important features of the deed in detail so you will be able to compare it with the deed you already have. The areas where I think you will find a difference in are:
  1. 1)  At the time of entering into the arrangement you must have a genuine intention of holding onto your units until they derive assessable income from the investment that exceeds the deductible expenditure you have incurred (paragraph 5 and 21)
  2. 2)  In order for the interest on the money borrowed to buy units in the trust, to be tax deductible to the unit holder, the units must give fixed rights to all of both capital gains and income from the assets that are purchased from all of the funds paid for the units (paragraph 21).
  3. 3)  If the trust redeems the units this must be done at market value (paragraph 20). Accordingly, the unit holder will be up for CGT on any increase in the underlying asset.
  4. 4)  The units must be issued at market value (paragraph 21)
Next ask yourself what do you intend gaining from incurring the cost of running a hybrid trust? Maybe it is ease of transferring the asset because the units are transferred instead so no stamp duty costs. All other trusts will give you the same benefit. If you think it is a better way to manage your estate, you have not considered the fact that a property passed from a real person on death does not attract CGT and this can go on for as many generations as you like. In most cases a trust can only last 80 years and then a CGT event is triggered.
For readers who are thinking; great, here is a hybrid trust that the ATO approve of, ask yourself first why do you want to use a hybrid trust? I fail to see any advantage in the trust deed approved by the ruling.
Other promoters of hybrid trusts have received private rulings along similar lines. At least Chan and Naylor obtained a product ruling so their future clients can rely on it. Anything less than a product ruling and you will need to get your own personal ruling from the ATO.
The private rulings the others have received are along similar lines to the above, in other words they only approve hybrids that provide no real tax benefits over and above other trust deeds. So when you are approached by someone offering to amend your hybrid trust deed to comply with the ATO requirements, consider that it is going to neuter all the tax benefits that you originally thought a hybrid could offer. As a result you are back to the old question of whether you are better off with a fixed or discretionary trust and ask for the amendments to accommodate this rather than a stock standard removal of the offending clauses. If you opt for a discretionary trust you need to look into how you can organize for the trust to be able to claim a tax deduction for your loan, this will probably mean triggering a CGT event but better now than when the property market recovers.