Nothing to be scared of, here.

Avid readers of the tax office legal database may have spied the release of a new Determination dealing with what we commonly refer to as hybrid trusts.

This is a follow-up to the draft released late last year, which we commented on as part of the House Rules newsletter at the time.

As per our explanation in that article, this final determination looks to be good news. We spoke with our legal advisors this morning to be sure, and they were as rosy as ever in confirming that the trust deeds and resolutions that we like to use still comply with what the tax office are looking for.

The determination in question deals with a few scenarios, none of which apply directly to how we usually do things. In each example presented, the trust has the ability to distribute income to a beneficiary in a discretionary manner, despite the units on issue; or, the borrowings were not used in full for the unitholder in question. In those cases, the unitholder is only required to receive a disproportionate amount of income, and thus their borrowings are not of a direct commercial nature and they incur an expense for the (potential or actual) benefit of others.

It’s also important to note that in the first example, we would suggest that (all else being equal) Paul’s wife would likely be eligible to claim the interest on her share of the loan to acquire her units.

Looking at that first example a little closer, we can draw a fairly clear line from that point. You see, the tax office were happy in that example to allow Paul to claim 50% of the interest incurred based on holding 50% of the units. It is not a far stretch to conclude that should he hold 100% of the units in that example, he would be able to claim 100% of the interest.

So; what we need to show is that the unitholders who borrow funds for the purpose of buying units in the hybrid trust with the expectation and entitlement of income, will indeed receive that income. The trust deed needs to be very clear in that requirement (as ours are), and of course, the distributions need to reflect that as well (as ours do).

This means that for investors who use their deeds properly, the hybrid trust can still be an excellent choice of structure in the right circumstances and this determination is nothing to be scared of. As always, they’re not a one-size-fits-all type of thing, so it’s always a good idea to speak with your accountant before choosing the structure for each investment that you plan to make. Or, if you are after further clarification on your particular situation as it currently stands.

~J.