Why does the NI platform not have hybrid trusts, or unit trusts that have ‘special’ units?

The issues in relation to hybrid trusts, or unit trusts with special classes of units are complex and the subject of focus by the Tax Office. Our Legal Partners can assist with establishing hybrid trusts and unit trusts with special unit classes, however the starting point is always to understand what the objectives of the client are. Some of the factors that need to be considered include the:

  1. fixed trust rules (including with reference to capital gains tax event E4 and the trust loss rules);
  2. land tax rules, particularly in NSW;
  3. approach of the Tax Office to hybrid trusts post the Twiggy Forrest decision;
  4. NALI (ie non arm’s length income) provisions where SMSFs are unitholders.

The creation of trusts with different classes of income and capital rights is also problematic due to the fluid nature of the distinction between ‘income’ and ‘capital’ under trust law. For instance, most deeds provide the trustee with discretion to determine whether amounts are treated as income or capital in order to ensure they can deal with taxable amounts such as capital gains in an effective manner. While these issues do not arise in the context of income and capital rights that may be allocated to shares in a company, they can create significant complexities where there is a desire to create a unit trust with different classes of income and capital units.

These arrangements can also trigger a number of other adverse taxation consequences that should be considered on a case by case basis, such as the operation of the value shifting rules under the Tax Act.

Our Legal Partners work with advisers to identify what they were trying to achieve with hybrid and special class unit trusts and tailor the deeds accordingly.

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