by Michael Messner
Trusts continue to be newsworthy, particularly when our political parties are in election mode and they want to appeal to the vast majority of Australians who are pay-as-you-go (PAYG) taxpayers.
The reform of trusts was put back in the spotlight when the Labor leader Bill Shorten announced that, if elected, the Labor Party would introduce a minimum tax of 30% on trust distributions to beneficiaries aged over 18 years. This proposal, which would apply from 1 July 2019, is directed at preventing income splitting.
Taxing trust income
There are existing rules that prevent a high income earner from channelling all or some their large salary (personal exertion income) to a trust and splitting the salary with family members who are on lower tax brackets, thereby reducing the overall tax paid on the income. But, provided that the individual is not trying to split personal exertion income with family members, income splitting using discretionary trusts is within the tax law if done properly.
Discretionary trusts can be particularly useful where, for example, high income earners have accumulated wealth and investments and do not want the investment income from these to be included in their assessable income. Using trusts for income splitting purposes in this way is legitimate.
Discretionary trusts are used mainly by wealthy taxpayers, given that the average PAYG taxpayer’s wealth is likely to be invested in a family home or in superannuation, neither of which requires a discretionary trust.
Bill Shorten refers to this as a “two class tax system” — those that have the financial means to restructure their affairs using a discretionary trust to sidestep the progressive tax system, and those who do not.
The Labor Party’s proposal is to effectively treat such income as unearned income and therefore subject to a minimum tax rate of 30%. This has been described as an extension of the anti-avoidance principle in current Div 6AA of the ITAA 1936 which imposes tax at the highest marginal rate on unearned income of minors.
Even so, being able to use a trust to channel income to an entity, such as a corporate beneficiary, that pays tax at the rate of 30% is still better than having that income taxed at an individual’s top marginal rate of 47%.
Michael Messner is a Senior Tax Trainer at TaxBanter.
A special seminar is planned for Perth on 13 May, Trustee reporting obligations: Casting a wider net. Click here for more details and to book your place.