A Hybrid Trust is a cross between a Discretionary and a Unit Trust. This type of structure is quite appealing because it includes the benefits of both and is an extremely useful structure. You can split the trust up into units while also having beneficiaries to distribute to at your discretion.
Hybrid trusts take the best features of a discretionary trust and the best features of a unit trust and blend them in the one entity to create a flexible structure. They allow the respective rights and entitlements of unrelated third parties to be respected, and once this is done, between those parties and all related persons (e.g spouses, children, related family trusts and so on).
The income tax, capital gains tax and asset protection attached to hybrid trusts means that they are often the preferred method of structuring a business or investment activity. This is particularly where more than one un-related party is involved: for example, two separate family groups who are buying a commercial property together.
Hybrid Trusts – Features & Benefits:
- With a corporate trustee – limited liability
- Provides more flexibility with tax planning
- Ability to issue and redeem units with no stamp duty in some States
- Income and Capital Gains taxed in the hands of beneficiaries
- Benefits / income can be passed to beneficiaries without change in ownership of the investments
- Control of investments can effectively be retained by the appointer of the trustee who normally places the asset in the trust
- Confidentiality of information as there is no statutory disclosure requirements
- No audit requirements – Accounts for Income Tax Return preparation only
- Easy entry and exit of owners
- Trusts are relatively simple to wind-up
- Cost of creation and administration of the trust is higher than an Individual or Partnership;
- Potential changes to legislation – Taxation of Trusts;
- Careful structuring required for negatively geared investments as Capital and Revenue losses could get quarantined in the Trust;
- Possible Land Tax treatment as a Special Trust in Victoria and N.S.W.; and
- When grossed up dividends are less than net losses from other sources, the refundable franking credit is lost and the carry forward losses are reduced by the amount of franking credit lost.
The ATO issued a Tax Determination against these Trusts used for property investment. Refer to our Property Investors Trust (PIT) which has an Approved Product Ruling from the ATO for property investments.
Chan & Naylor is Australia’s leading property, business, tax-accounting & wealth advisory group with offices nationwide.