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The Commissioner of Taxation has issued Taxpayers Alert TA 2008/3, to voice a number of concerns he has in relation to certain features of some Hybrid Discretionary Trusts. The particular features which the ATO appears to have the most difficulty include:

• an ability to defeat a unitholder's entitlement to receive distributions of fixed proportions of trust income and capital gains;
• a unitholder not being entitled to receive distributions of trust capital gains at all;
• interests or entitlements being conferred upon associates of a unitholder for less-than-market-value consideration;
• a unitholders entitlement to receive distributions of the trust ordinary income being less than what it should be, meaning that they've borrowed to fund income to which other beneficiaries are entitled;
• a unitholder only being entitled to receive distributions of the trust capital gains;
• a unitholder's interest in the trust ending before the cost of their investment has been recouped;
• a unitholder redeeming their units at their purchase price or less than market-value; and
• units being purchased at an amount less than their market-value.

Many of the concerns of the Commissioner would not affect the majority of users of Hybrid Discretionary Trusts.

A Private Binding Ruling has been issued to one particular taxpayer on 11 April 2011 and it is only that taxpayer that may bind the Commissioner to what is said in the PBR. The PBR states:

Question

• Are you entitled to a full deduction for interest expenses incurred on borrowed money used to acquire Special Income Units in the Macquarie Group Services Trust (the Trust) under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

• Yes. A full deduction is available for the interest expense incurred in the circumstances described in this ruling.

Please note that the ruling is a Private Binding Ruling and therefore only applies to the recipient. To gain the same level of certainty taxpayers need to apply for their own Private Binding Ruling.

• MGS has been in communication with the ATO for years concerning hybrid trusts,
• MGS has been working with the ATO to work out an acceptable form of deed that would entitle the Special Income Unitholders to a full deduction,
• MGS is the only deed provider to have a deed which has been the subject of a favourable ruling,
• MGS knows what the ATO will allow and how to amend deeds without causing a resettlement,
• MGS knows what issues concern the ATO that aren't in the amendment

• Deed of Variation,
• A full copy of the Private Binding Ruling issued to Christopher Batten,
• A copy of the Reasons for Decision issued to Christopher Batten,
• An outline of the history of hybrid discretionary trusts,
• A guide to what the amendments mean,
• A guide to using the trust after the amendment.

If you established the MGS Hybrid Discretionary Trusts prior to 2011 then you should have the deed amended so that it is in line with what is accepted by the ATO. Some features which formed part of the deed to which the ruling relates were only settled in 2011.

• Documents for use by Accountants - Register or Login to Access
  • Copyright Disclosure Deed - Download & execute the copyright disclosure deed & forward to MGS with a copy of your deed(s)
  • MGS HDT Client Letter
  • Updating Your Hybrid Discretionary Trust

The Property Investor Trust is a particular hybrid discretionary trust developed by Chan & Naylor. Many of the clauses and features would not be acceptable to the ATO and therefore a full deduction in relation to any borrowing would be at risk. Contact MGS for an amendment to bring the deed in line with what is accepted by the ATO.

• Documents for use by Accountants - Register or Login to Access
  • Copyright Disclosure Deed - Download & execute the copyright disclosure deed & forward to MGS with a copy of your deed(s)
  • MGS HDT Client Letter
  • Updating Your Hybrid Discretionary Trust

I have another hybrid discretionary trust - What should I do?

The hybrid discretionary trust you have established should be checked and if necessary amended to bring it in line with what is acceptable to the ATO. The trust deed, application for units and unit certificates should be reviewed and where necessary amended.

• Documents for use by Accountants - Register or Login to Access
  • Copyright Disclosure Deed - Download & execute the copyright disclosure deed & forward to MGS with a copy of your deed(s)
  • MGS HDT Client Letter
  • Updating Your Hybrid Discretionary Trust