All the flexibility of a discretionary trust — with the ability to issue Special Units conferring fixed income entitlements when required. One deed. Two modes. ATO-compliant. Drafted by MGS in direct consultation with the Commissioner.
An MGS Hybrid Discretionary Trust has all the features of an MGS Discretionary Trust — a Settlor, Trustee, Appointor, Controller (optional), Principal Beneficiary, and broad beneficiary class — but additionally vests the Trustee with the power to issue Special Units.
The Special Units may be called Special Income Units, Special Capital Units, or any other distinctive name the Trustee determines. The income and capital rights attaching to each class of unit are described in the Certificate of Units issued on creation. In this way, the trust can operate simultaneously as a discretionary trust (for general beneficiaries) and as a fixed-entitlement structure (for unit holders), or alternate between the two modes as circumstances require.
There do not have to be any units on issue at the time the trust is created — or ever. Where units are issued, they must be issued and redeemed at amounts reflecting the market value of the underlying trust assets, to protect unit holders' interest deductibility and to avoid the CGT market-value substitution rules.
The trust can operate in discretionary mode, unit mode, or both simultaneously. The Trustee switches between modes by issuing or redeeming Special Units.
The MGS Hybrid Discretionary Trust has the same party structure as a discretionary trust — plus the addition of Special Unit Holders when units are issued.
Pays the Settlement Sum to establish the trust. Must not be a beneficiary — to avoid adverse tax consequences. Typically an unrelated person (a staff member, friend or relative of the adviser) who takes no further role in trust affairs.
Holds legal title to the Trust Fund and administers the trust. In a hybrid trust the Trustee has the additional power to issue Special Units. Typically a corporate trustee. Owes fiduciary duties to all beneficiaries and unit holders. Liable for trust debts with a right of indemnity from trust assets.
Holds the power to remove and replace the Trustee at any time by written notice. The Appointor exercises effective control over the trust — the Trust Fund is accountable in Family Law Act property settlement matters. More than one Appointor may act jointly.
The Primary Beneficiary anchors the general beneficiary class — their spouse, children, parents, grandparents and other relatives are automatically included. No beneficiary has a vested interest in the Trust Fund. Trustee distributes income and capital at absolute discretion. Primary Beneficiary is the default taker of undistributed income.
Where named, provides consent for certain trustee actions — such as appointing additional beneficiaries, varying the deed, and determining an earlier Vesting Date. The Family Court is likely to find that a Controller has control of the trust for property settlement purposes.
Persons or entities issued with Special Units. Each Special Unit confers a fixed income entitlement as described in the Certificate of Units — typically the proportional share of trust income reasonably attributable to the unit holder's investment. Unit holders must acquire and redeem units at market value. Their entitlement cannot be defeated, even by trustee accumulation.
Special Units are the distinguishing feature of a hybrid discretionary trust. The Trustee may issue them at any time — at $1.00 each (recommended for simplicity) or at another denomination — provided the total value of units issued reflects the market value of the unit holder's proportional interest in the underlying trust assets.
For example: a trust with assets of $500,000 that issues 250,000 Special Units at $1 each would give those units a 50% interest in the trust. Those units would then be entitled to 50% of the income of the trust reasonably attributable to the investment — both ordinary income and realised capital gains.
The rights attached to each class of unit are set out in the Certificate of Units. The Trustee has absolute discretion in determining those rights — subject to the ATO's requirements to protect interest deductibility.
Apart from their redemption entitlement, holders of Special Units do not have an entitlement to any part of the corpus (capital) of the Trust Fund — unless the Certificate of Units specifically provides for capital entitlements (as in the case of Special Capital Units).
To be entitled to deductions for interest expenses on borrowings to acquire units, unit holders must:
In Taxpayer Alert TA 2008/3, the Commissioner identified a number of features of poorly drafted hybrid discretionary trusts that jeopardise the deductibility of interest on unit holder borrowings. These features were found in trusts where providers made overly aggressive claims — including that capital gains could be streamed away from unit holders, that units could be redeemed below market value, and that no adverse legislation could ever affect the deed.
MGS has been in communication with the ATO for years concerning hybrid trusts and worked directly with the ATO to produce a compliant form of deed. The MGS deed does not contain any of the features that the Commissioner has described as offensive. MGS also holds a Private Binding Ruling on the deductibility of interest confirming the position for MGS hybrid trust unit holders.
Whether it was established through MGS or another provider, your hybrid trust deed should be reviewed for TA 2008/3 compliance.
If your MGS Hybrid Trust was established before 2011, the deed should be amended so it is in line with what the ATO accepts. Some features which formed part of the ruling were only settled in 2011. MGS provides a full Amendment Kit including the Deed of Variation, the Private Binding Ruling and Reasons for Decision, and a guide to using the trust after amendment.
The Property Investor Trust is a hybrid discretionary trust developed by Chan & Naylor. Many of its clauses and features would not be acceptable to the ATO, and interest deductibility for geared unit holders would be at risk. Contact MGS for an amendment to bring the deed in line with what the ATO accepts.
If your hybrid discretionary trust was established through any other provider, the deed should be checked and — if necessary — amended to bring it in line with what the ATO accepts. The trust deed, application for units, and unit certificates should all be reviewed.
Common questions about the MGS Hybrid Discretionary Trust. Contact our team for matters specific to your client's circumstances.
Create your MGS account or log in at macquariegs.com.au. Registration is free and takes under two minutes.
Provide the Settlor, Trustee, Appointor, Controller (if any) and Primary Beneficiary details. Our form guides you through each field required to establish both the discretionary and unit trust aspects of the deed.
Our team prepares a bespoke ATO-compliant MGS Hybrid Discretionary Trust deed to your specifications. Standard turnaround is 1–2 business days.
The deed, binder and explanatory memorandum are delivered ready for execution by the Settlor and Trustee. The memorandum covers establishment, stamp duty obligations, and guidance on both the discretionary and unit phases — including unit issue, the 30 June resolution, and correct unit redemption procedures.
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