Can trusts keep avoiding $3.5b in taxes and Bill Shorten’s threats to make them pay?
Last year, Opposition Leader Bill Shorten threatened to crack down on family trusts being used to avoid taxes.
He vowed to impose a 30 per cent tax on distributions to family members in a trust.
So, what is a family trust? Sounds like something we would all like to have.
But the truth is they are complicated structures and only of real value to those with substantial wealth through a variety of diverse assets and businesses.
According to The Australia Institute, 2017 Australian Taxation Office (ATO) figures suggest there are 800,000 trusts with assets totalling more than $3 trillion and which are costing the Government $3.5 billion in foregone tax income.
Trusts are umbrella funds where assets and the income they generate are placed to make it easier for an accountant or financial adviser to help manage the various taxes and other regulations that apply to different assets.
They are not cheap to operate, which is why only investors with assets generating considerable wealth (which goes back into the trust) can afford to have them.
People set up family trusts to legally protect assets in cases where relatives divorce. It is difficult for Family Law to crack open a trust to retrieve proceeds demanded in a settlement by a divorcing spouse.
Trusts are also sometimes set up to bolster the income of older parents or young adult children at university, for example. Children under 18 years of age are generally ruled out from being trust beneficiaries.
They can also be used to play favourites among adult children. A family trust dictates who the beneficiaries are and unless you are named in the trust, the law is clear that you cannot benefit from the assets within a trust.
And of course, a trust is quite handy for minimising tax. By applying a formula that takes into consideration the person in the trust with the lowest income and thus the lowest marginal rate, it helps to bring the tax burden down across all the assets. It serves like a type of income-splitting mechanism, except wages cannot be paid into the trust, only earnings from investments and businesses.
The ATO has tried its best to explain the myriad of complex rules that govern family trust structures, but it remains mind-boggling for most of us. For example, read this explanation of when a spouse is or is not allowed to benefit from a family trust:
The spouse of the deceased specified individual will continue to be a member of the family, provided they were the spouse at the time of death. If the spouse of the deceased specified individual or a member of their family becomes the spouse of a person who is not a member of the deceased specified individual’s family, the spouse will cease to be a member of the family. Instead, the former spouse of the deceased specified individual or a member of their family becomes a member of the deceased specified individual’s family group. This means that the former spouse of the deceased specified individual won't have concessionary treatment under the income injection test.
Much of the governance around family trusts involves having a ‘family trust election’ (FTE). This peculiarly worded term refers to the principle around which the trust is built … somewhat like the keystone that holds everything together. Officially, they are known as the ‘test person’.
To be part of the trust, you must be directly related to the FTE or married to someone who is. A trust can continue to operate for family members even after an FTE dies.
Have you ever considered setting up a family trust? Do you agree with the Opposition Leader that wealthy families should not be allowed to minimise their tax by using trusts?
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