Labor is justified in targeting trusts

By Leith van Onselen

Labor leader, Bill Shorten, confirmed over the weekend that the party would target trusts, which it views as a tax shelter favouring the wealthy. From The AFR:

Opposition Leader Bill Shorten will detail a Labor clampdown on trusts and other tax minimisation vehicles…

Mr Shorten confirmed the push against trusts on Sunday…

Asked if family trusts – estimated to hold about $3 trillion – were in Labor’s sights for reform, Mr Shorten said trusts had sound legal protection.

“But I’ve made it very clear that I do have a principle and that is we should have one tax system for all,” he said on the ABC’s Insiders…

Mr Shorten said trusts were “a legitimate business tool”, and he was committed to “clarifying, updating and rewriting Australia’s trust laws” in a way that would “greatly assist the 660,000 trusts in Australia”…

Shorten’s proclamation over the weekend follows new research released by The Australia Institute (TAI), which shows that the equivalent of 21.6% of Australia’s national income was run through a trust, which is overwhelmingly skewed to high income earners. Below are the key extracts:

According to the ATO in 2014-15 (the latest year available) there were 823,448 trusts with assets of $3.1 trillion and revenue (total business income) of $349.2 billion.10 Of the 823,448 trusts 642,416 or 78 per cent were discretionary trusts which ‘are established by the person who sets up the trust i.e. the trustee, and the trustee has the power to choose, at his or her own discretion, the amount of money that will be paid to each beneficiary under the trust… the trustee has the discretion to choose which beneficiaries receive payment and how much payment they receive’.

From the national accounts data for the year 2014-1512 The Australia Institute estimates that 21.6 per cent of Australia’s national income was run through a trust.

To most people this must seem very strange. We understand how individuals are taxed and recognise other taxable entities such as companies but most people would be unfamiliar with trusts. And the fact that they are so large, some 22 per cent of GDP, does sound very high. Moreover, trusts have been growing rapidly in recent years.

Figure 1 gives illustrates the data for the number of trusts for the period over which the ATO has made the data available.

Figure 1 shows how most of the growth has been in discretionary trusts which grew from 329,475 in 1996-97 to 642,416 in 2014-15, and increase of 95 per cent. The nondiscretionary trusts grew by a more modest 39 per cent from 130,555 to 181,032 over the same period. Growth in discretionary trusts has far outweighed the growth in nondiscretionary trusts…

Revenue forgone

One observer, Dale Boccabella, Associate Professor of Taxation at the University of NSW, has estimated the revenue loss at $2 billion per annum.13 It is hard to imagine anyone would set up a trust unless there was another legitimate reason or there were tax advantages of at least one per cent of income. An alternative and very conservative estimate would be that the revenue foregone might be one per cent of the total business income received by trusts or $3.5 billion. Given the ATO figures for the number of taxpayers, tax avoidance through trusts would cost each taxpayer an average of $202 per annum on Boccabella’s figures and $354 per taxpayer if the one per cent assumption is correct…

The Australian Bureau of Statistics gives estimates of household wealth which includes specific assets such as bank accounts, shares and other categories and, for our purposes, includes a series for the value of private trusts. These figures are shown for households by quintiles starting with the bottom quintile of wealth holders and ending up at the highest quintile. That data is presented in Figure 2.

Figure 2 shows clearly that virtually all wealth held in all private trusts is by the 20 per cent wealthiest households who hold an average $123,100 in private trusts. Indeed, while the net wealth of the top 20 per cent is 71 times the bottom 20 per cent, in relation to private trusts the top 20 own 1231 times the amount owned by the bottom 20 per cent. Put differently the top 20 per cent account for 95 per cent of the value of all wealth held in trusts…

On average 13.6 of all taxable taxpayers receive a distribution from a trust (or partnership). Figure 4 shows the proportions in each tax bracket who have some distribution/s.

Figure 4 clearly shows that higher income earners are most likely to receive a distribution from a trust (or partnership). Hence 48.4 per cent of those with incomes over half a million dollars—almost half—receive some sort of distribution…

In short, Labor appears to have strong grounds for targeting trusts.

Full report here.

Comments

  1. “Figure 2 shows clearly that virtually all wealth held in all private trusts is by the 20 per cent wealthiest households who hold an average $123,100 in private trusts.”

    Well, blow me over with a feather! Households in the bottom 80% don’t have $100,000+ of liquid assets to their name, those in the top 20% do. Quelle surprise that the top 20% tend to have assets in trusts and the bottom 80 don’t….

    • Ps – this is not to say that trusts aren’t tax minimisation vehicles that need to be stomped on. It’s just saying that those numbers aren’t the case for it.

      Trusts will only be reformed if the farmers can somehow be appeased/compensated.

      • innocent bystander

        and some small family businesses?
        think it is to do with asset protection (inheritance, in-laws etc) and distributing income to family members who may help/work

  2. Lot of assumptions and no actual evidence. Maybe typical of TAI. Your kids need to be over 18 and lounging about the house earning damned all. Also the ATO’s rules going back five years or so meant the long term death knell of most trusts. You have to distribute income out of a trust and you can only lend it back at full IR plus it has to be repaid out of the trust. So you can’t hold undistributed capital in the trust and, in the end, you run out of working capital.
    Might be the reason for the current downtrend in the numbers perhaps?

    As to other reasons – maybe look at the stupid damned legal system and its laws where if some woman spends a couple of nights at your house she can get half!!!

    • DouglasMEMBER

      Well done Flawse. Division 7A has made trusts a nightmare. They have already been stripped of use so these critics are living in some dream world. It is about time that the self reliant fought back against this blatant discrimination on income and superannuation where public servants who devised the system so that they have escaped regulation, What about an attack on public servants’ entertainment allowances, untaxed car use, overseas expenditures on the taxpayer etc etc. Again they were unscathed by the FBT.

      • True. Half the opposition to Trust is by people who do not understand the first thing about Trusts.

      • Div 7a is only related to borrowing money from trusts. You can still divide up income at your discretion to all 18+ beneficiary.

      • @kevin
        If the beneficiaries are under 18 the trust gets taxed at 47.5% What the hell is the use of that over a company that can hold its profits paying 30% (approx)

    • Loophole is in the treatment of CG’s on Trust assets. If the beneficiary is an individual they get the discount v an individual company shareholder who wouldn’t get the discount on company assets when both could be used as investment holding structures.

      • So the big deal’ here is that Trusts (in some instances) receive the same benefit as individuals.

        Really, I don’t think the CGT discount is such a huge deal.

      • Hill Billy 55MEMBER

        You would get a debate with High Rise Harry on that. He has stated quite publicly most of his income is derived through Capital Gains through his Trusts and taxed at the discounted rate.

      • It’s a huge deal as Hill Billy said. Most high net worth investors would use trusts as investment holding structures. Another loophole is using multiple discretionary trusts.

      • So this is the big loop hole? They get the same tax treatment as if they owned individually, but with the ability to push distributions to other beneficiaries. This is attractive, Yes. You’ll find that the dollars of ‘tax missed’ here are not so great. Most ‘tax missed’ would be personally held investment properties geared in the individuals name. Not very common that people can get full benefit of negative gearing via a trust.

  3. I would suggest taxation is the cause of inequality rather than the lack of taxation. Que socialist lefties squeeeeeeling !
    Equality and Justice are completely different. Have a flat rate income tax with no exemptions, there goes the necessity for a trust for taxation avoidance.

    • Flat tax? Only if a $10k/year cheque is given to each poor voter.

      That is what Milton Friedman wanted!

      What a hero ❤ against poverty and against red tape!

      The “compassionate” Greens did not even give me a $5 cheque between 2010 and 2013.

    • sydboy007MEMBER

      Maybe not a totally flat tax, but certainly set a lowish rate that covers the 9X% and then one slightly higher for the rest.

      make it bloody difficult to minimise to get under the upper limit income level. A start might be to limit how much you can pay to manage your money and the advise you get.

      bring in a broadly based land tax while you’re at it, get rid of all the gst exemptions, and then maybe set the tax free threshold at something similar to the aged pension. sayonara stamp duty.

      Kill off welfare for anyone above the lowest 30% and make it so you don’t need a phd in applied mathematics to understand how all the various schemes interact.

      Just gut the atx system. minimise what you can claim back and funnel that into lowering taxes. then start to look at how you can stop big corporations from mining the tax system like they do.

    • Not true. In many cases the overriding purpose for using trusts are for asset protection.

    • drsmithyMEMBER

      How is tax a cause of inequality when, as I’m sure you’ll remind us, about half the population pays no net, and huge swathes of those left are dodging it with negative gearing and the like ?

      We need more tax brackets, not fewer, and more closely aligned with the actual income disitrubtution curve. It is ridiculous someone earning 180k is in the same marginal Barack as someone earning a couple of million.

      Oh yeah, and some wealth taxes.

      • It seems the demography of MB commenters are completely different to before. Never have I seen so many cheering for ways for the rich to avoid tax.

      • Terror Australis

        Correct, Kevin.
        MB is a virtual water cooler for a LARGE number RWNJ’s these days.
        Sad!

    • Tassie TomMEMBER

      @ Lisinopril – great comment!

      I’m all for universal basic income, flat income taxes equal to the company tax rate (whatever you want to make them), annual flat wealth tax, and cutting heaps of “exemptions”.

      People always want to “increase tax for the rich”, but then they increase it for high income earners. High income earners and the rich are often the same people, but they are often not the same people too.

      • To the likes of Madoff, the biggest mistake he made was simply getting caught by staying too long in the game and not fleeing to a non-treaty country will untold millions.

  4. All they have to do for a landslide.
    1. Federal ICAC
    2. Cut immigration
    3. Implement Anti Money Laundering Legislation on property
    I strongly believe by having a Federal ICAC as a watchdog, #2 and #3 and a whole lot of logical measures (stonewalled by illogic, thru lobbyists) will naturally follow on.

  5. If those who run or benefit from trusts represent say 20% of voters,
    any change is going to be hard, given FBT benefits still exist for those cruising weekends for gods sake?.

  6. “Figure 4 clearly shows that higher income earners are most likely to receive a distribution from a trust (or partnership).”

    If that’s tax avoidance they’re doing it wrong…

    It’s a pretty basic and oversimplistic paper to be honest.

  7. Just so I’m on the same page of everyone else, my understanding is that income goes the trust, pre tax. It is then divied up among people and then they each pay tax on the amount. A hypothetical example being that $300k goes in, there are ten people who are nominated to receive an income stream from the trust and so they get $30k each, thus minimising the amount of tax paid.
    If the above is the case, then I’m for cracking down on this practice. Or they can allow people on salaries that are currently PAYG to receive their pay in full, and then break it up among non working family members to receive the same tax minimisation opportunities.

    • It really only works if the beneficiary is over 18 in which case you could ask how many non-working family members could there be?

      • Partner, 2 over 18 kids. 2 parents, 2 in-laws if you have good relations. I’ve even seen brothers & sisters, and nieces and nephews.

    • Also Footsore, there are personal exertion rules that stop people from earning money of their own back, and paying less tax with a trust. So your example above would be correct for investment earnings on assets held within the Trust or on Business earnings which are not caught by the personal exertion rules (ie: mandated to be received by an individual).
      Really there isn’t a big scam here. Just alot of talk bu people who don’t see how trusts are really used.

      That said, some of the Everett Assignments being approved by the ATO are fairly damn generous. Though this isn’t an arguments against Trusts, it is more about what the ATO deems to be a fair split for Everett Assignments.

      • So the income stream dictates whether or not something similar to my example happens? I got that from your statement:
        “So your example above would be correct for investment earnings on assets held within the Trust or on Business earnings which are not caught by the personal exertion rules (ie: mandated to be received by an individual).”
        So the question I’d pose is why is $1 income from one source different to a dollar from another source for taxation purposes?

    • boyracerMEMBER

      Footsore,

      You are mostly correct but PAYG salary can not be treated in this way. Tax is paid by the person that earned the salary, not where it was paid to. No doubt there are some shonky arrangements but generally trusts are to allocate investment or business income.

      Accounting firms have been doing this for ages. They push their partner income through a trust so no doubt the wife gets some in some cases. If memory serves they got a special ruling on this decades ago. Even though it really is personal services income it essentially gets treated as business income and able to be split. Probably some nuances I’ve left out it was a long time ago I looked into this.

      • Boyracer,

        You’r correct. Most professional service firms operate in this manner. With a percentage of billings going to Service Trust. The idea is that there is an operation business providing the frame work for partners to be able to generate their billings. Typically it might be 10-15% can go via a Service Trust.
        Though now the ATO is letting a number of firms sell a percentage of partnership interest into a trust (Everett Assignment). h is generous, basically 50% minimum (I’ve seen up to 70%) of billings going into a Trust. All the big firms have done or are doing it currently. But this isn’t a Trust problem it is, depending on your views, an ATO ruling issue.

    • Income deemed to be personal exertion income (PSI) must be taxed in the hand of who ever generated it. So income from a one man business can be treated differently than rental or dividend income.
      There are limits and tests to determine what is PSI to keep this side of things fair.

      • Only if over 50% of the income if through your effort. If you have other employees and the company makes a profit, it does not apply. Also there are other exceptions you can exploit.

      • YEah, or match the highest paid employee of the firm, etc.

        All these rules are based on fair principals really. Eg: a legal partner, who might generate $2M of fees, will have a serviced office, a solid brand name, and a support team etc around him , etc. In my opinion this rightfully allows them to treat what they are doing as carrying on a business, and as such to place some of the distributions via another entity, wife, etc. Though, if this is seen as an issue, it isn’t a Trust problem. It is the PSI/ATO rules allowing them to allocate income elsewhere. The use of a Trust to receive some distribution if just a consequence of them first being able to choose to send the allocation elsewhere.

  8. trusts are used because the Govt is so hell bent on taxing the arse out of SME’s and not large multinationals

  9. Hello UE,

    You state that “Figure 4 clearly shows that higher income earners are most likely to receive a distribution from a trust (or partnership). Hence 48.4 per cent of those with incomes over half a million dollars—almost half—receive some sort of distribution…”

    Yet you state that this is grounds for targeting Trusts?

    What sort of illogical argument is that?

    Those on above $180K are paying the highest MTR – Hence there is no tax ‘loss’ to the Government. Yet, you claim this is grounds for a crack down?

    Also, this data is very likely the result of high earning professions (such as Legal, Accounting, Medical) operating through trusts. Also large farms and family businesses. Thus, the data really only shows what we already know. That the use of trusts is prevalent in those with: (A) the professional need to operate through a Trust and/or (B) enough financial capacity to justify investing via a Trust. Using this data to justify a ‘crackdown’ on trusts is nothing but tall poppy syndrome and a half-baked understanding of current trust/tax law.

    • Correct, they are largely used by small business to hide assets from liability, and pay the wife. High income earners only really benefit from the protection bit full stop

      • Yes, exactly my point. Their evidence for justifying a crackdown is that a whole bunch of taxpayers who pay the top tax rate receive a distribution… To me that is evidence that a crackdown is not required.

  10. Quite a poor article. Shows the writers have zero understanding of Trusts in Australian Tax Law, I’d agree with Flawse TAI tend to do articles like this that make little sense. However I still contend that the Trusts that do need to be taxed more are Superannuation Trusts of all kinds. They represent Cayman Islands Australia. If Mr Shorten started with them he’d possibly have some credibility.

  11. laughing at all the previously righteous posters in this thread, who are now squealing because their little rort might get taken away

      • Sure Coming.
        I hold the few assets I have within a trust because I am liable to be sued at some stage during my professional career. I would not like to my hard earned assets to potentially vanish. Also, when I am lucky enough to own a family home my wife will own it, for the very same reasons. Also for the same reason,if I am lucky enough to receive an inheritance it will come the way of a Testamentary Trust – so that any of my parents assets they choose to leave me do not end up in the others hands.

        Also, I make use of a superannuation fund for the same reason. Which, funnily enough is another type of trust.

    • That is just a load of bullshit on the grandest scale. Read the posts by those who happen to know something about it. This way below you!!!!

  12. I know a number of people who ‘alienate’ personal income, via companies and trusts, to minimise tax. eg. a doctor who pays his wife and his daughter at uni over 50/hr for basic admin. A designer who paid his wife 20k pa to do the very simple books. Both otherwise very lovely community minded people. Can only imagine what the un-apologetically greedy are doing.

    Poor PAYG earners get shafted, between the transfer pricing multinationals, the cash taking tradies, the psi alienators and the no tax paying wealthy retirees!

    • Erusso,

      Well what you’ve said is already governed by tax law. Tell your friend to pay his wife $200K for the books and see how it works out? There are reasonable laws in place that would catch that out. This is not an argument against Trusts. This technique applies to business in general whether via structured via Company, Trust or Partnership.
      I agree, wage earners are screwed to a degree.
      The one serious tax scam in Australia was unlimited 0% tax pension. That has now been closed.