Crack­down on fam­ily trusts be­comes law

The La­bor pro­posal aims to limit the abil­ity of fam­i­lies to min­imise tax by split­ting in­come

Money Magazine Australia - - FAMILY MONEY -


La­bor is plan­ning to tax dis­tri­bu­tions from trusts at a min­i­mum rate of 30%. Cur­rently dis­tri­bu­tions are taxed in the hands of the in­di­vid­u­als who re­ceive them at their mar­ginal tax rate, which the­o­ret­i­cally means they could be taxed at any­thing up to the top mar­ginal rate of 47% plus the Medi­care levy.

In re­al­ity, how­ever, many peo­ple use trusts to min­imise tax by di­rect­ing trust in­come to non-earn­ing or low-earn­ing ben­e­fi­cia­ries. This is why La­bor ar­gues that trusts give the wealthy (who pre­sum­ably can pay ac­coun­tants to set them up and run them) an un­fair ad­van­tage over pay-as-you-earn work­ers who don’t have the op­tion of di­rect­ing their in­come to some­one else.


A trust is a le­gal en­tity set up to hold as­sets, usu­ally within a fam­ily or ex­tended fam­ily. So in­stead of buy­ing a busi­ness or an in­vest­ment portfolio in his own name, Fred Nerk might choose to set up a trust to own those as­sets.

A trust can be ei­ther fixed, which means the ben­e­fi­cia­ries have a spe­cific en­ti­tle­ment to trust as­sets and in­come, or dis­cre­tionary, which means the trustee de­cides who ben­e­fits from trust as­sets. Be­cause of their flex­i­bil­ity, most fam­ily trusts are struc­tured as dis­cre­tionary trusts.

There are sev­eral ad­van­tages to this. First, if the trust is prop­erly struc­tured, Fred doesn’t own or con­trol the as­sets, so they should be pro­tected from his cred­i­tors if Fred should be bankrupted at some time in the fu­ture. They should also be pro­tected from le­gal claims against Fred if he is sued for neg­li­gence.

But that’s not what has them in La­bor’s sights. The trustee of a dis­cre­tionary trust also has the abil­ity to de­cide from year to year which ben­e­fi­cia­ries will re­ceive any in­come or cap­i­tal dis­trib­uted by the trust. So if Fred is on a big salary, he may re­ceive no dis­tri­bu­tions from the trust. In­stead, they may be dis­trib­uted to lower tax pay­ing fam­ily mem­bers such as Fred’s non-work­ing wife, his re­tired fa­ther and his daugh­ter, who is study­ing full time at uni­ver­sity. All will pay much lower rates of tax than Fred would have if he had re­ceived the trust in­come.

If, later on, Fred re­tires but his daugh­ter takes on the fam­ily busi­ness and earns more in­come, the trustee may de­cide to dis­trib­ute the in­come to Fred and his wife to min­imise the tax payable.

Note, how­ever, that penalty tax rates

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