The Taxation of Family Trusts

By Renton, Nick | Review - Institute of Public Affairs, May 1998 | Go to article overview
Save to active project

The Taxation of Family Trusts

Renton, Nick, Review - Institute of Public Affairs

The impression is often given that trusts exist merely to evade taxes.They have far more important reasons to exist than that.And their tax advantages are very limited or even non-existent.

THE social welfare lobby and the Commissioner of Taxation are both calling for changes to the income tax treatment of family trusts and their beneficiaries. Trusts are being portrayed as the rich person's tax dodge. Is this correct?

Inter vivos (that is, living) and testamentary trusts have been around in England for hundreds of years and in Australia since colonization. They pre-date income tax and were not, as is sometimes suggested, invented in order to minimize tax.

Family trusts in particular have many non-tax uses-for example, the passing of assets from generation to generation, the making of provision for young children, the pooling of family wealth to enable larger and more efficient investments to be made and the ability to make gifts with strings attached. Such trusts are often used to run small family businesses-this helps to protect personal assets against business creditors and business assets against personal creditors.

Unlike many artificial tax minimization schemes in current use, the employment of a trust structure does not ever reduce the total amount of income which is subject to tax. The most that it can ever do is lower the rate of tax which applies to that income and even that does not always occur.

Furthermore, in most cases a trust structure reflects the real-life position -- namely, that the total income flowing into a family is actually intended to be for the benefit of the whole family and not just for the benefit of a single socalled breadwinner. Thus, spreading family income around for income tax purposes is no more immoral than spreading it around for spending purposes. In the current era, looking after one's family is usually considered a good thing in Australia.

In practice, most family trusts do socially useful things. They invest only in genuine, conventional investments of exactly the same type as those normally selected by highly conservative personal investors for their own portfolios. Some stimulate the economy by financing small businesses. Such trusts should certainly not be discriminated against.

It is, of course, true that-because of the sliding scale of income tax in current use-splitting income among a number of different beneficiaries with low marginal tax rates can produce a smaller total tax bill than if all the income were left to be taxed at a higher rate. The same phenomenon, however, can apply to income channelled through partnerships or companies.

This approach is indeed unfair to ordinary wage earners who lack the ability to split PAYE income in a similar fashion. The remedy for this, however, would be to allow notional splitting of such incomes-not to do away with trusts.

One proposal mooted from time to time is to tax trusts as though they were companies. This would undoubtedly bring in more revenue, at the expense of trust beneficiaries.

The reasoning seems to be that some items which can be distributed tax-free through trusts would attract tax if channelled through companies as unfranked dividends-for example, capital gains within the indexation componet, building allowances or amounts arising from the revaluation of assets. This is indeed an anomaly in the legislation -- but the proper way to correct it is to change the way companies are taxed so that transactions which Parliament intends to be tax-free stay that way.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

The Taxation of Family Trusts


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?