A hybrid trust, as the name suggests, is generally a hybrid of a discretionary and a unit trust. The term "hybrid trust" is a generic term for a trust which has elements similar to both discretionary and unit trusts, and there are many different forms of hybrid trusts. Therefore, when a tax practitioner talks about a hybrid trust they could be referring to one of a number of different forms of hybrid trust.
One common form of hybrid trust endeavors to combine the best elements of a unit trust with the best elements of a discretionary trust in the one entity, and has both unit holders and discretionary beneficiaries. The trustee has the discretion to distribute income to the discretionary beneficiaries, and the unit holders then have a right to receive income and capital that has not been distributed to a discretionary beneficiary. Alternatively, the unit holders may be entitled to all of the income of the trust, but may have a right to redeem their units for face value, at which point the trustee will have complete discretion when distributing income (and capital).
Whilst there may be valid non-tax reasons for establishing such a structure, the ATO has stated that the tax benefits often marketed in relation to them (such as the unit holders being able to claim a deduction for any interest incurred on borrowings to acquire the units) will not be available. Refer to TD 2008/D16 and TA 2008/3.
There are many versions of hybrid trusts, and not all of them have been targeted by the ATO. In addition, there may be legitimate non-tax reasons to use a hybrid trust structure, such as those set out for a Class Trust.
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