Every few years proposals are made about significant taxation reform on discretionary trusts (commonly referred to as ‘family trusts’). From the entity tax proposal of the early 2000’s, to the recent submissions made by KPMG to phase out discretionary trust access to the 50% capital gains tax discount. These proposals often receive support from some quarters on the assumption that trusts are used by the “rich” to exploit tax loopholes. Such thinking is generally misguided.
Trusts are not an entity, like an individual or a company is, they are a relationship between the legal owner of assets (the trustee) and the beneficial owner of assets (the beneficiaries). From an income taxation perspective, tax is paid by the beneficiaries of the trust who receive distributions in a given year, and any undistributed income is taxed in the hands of the trustee at the highest marginal rate. From a capital gains taxation perspective, the same principles apply – CGT is paid by the recipient of the gain, and any discounts that apply will depend on the beneficiary’s personal circumstances.
The suggestion that family trusts are a tool of the ‘rich’ is unfair. A significant proportion of small to medium enterprises in this country are owned and operated through discretionary trust structures – including a substantial number of farms and other rural enterprises.
Discretionary trusts offer legitimate asset protection and estate planning benefits, and it is unfair to suggest that the many families associated with them are tax evaders or ‘rich people…exploiting loopholes’.
Taxation reform is needed in Australia, however care must be taken so as not to throw the baby out with the bathwater by attacking discretionary trusts.
If you have any queries about trust structures or small business, please contact us on (07) 5606 7332.
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