Labor has announced their much awaited policy regarding discretionary trusts (see here). They've seemingly moved past the boudnary of family trusts, perhaps realising there's no such thing beyond tax law, and that people could still use discretionary trusts for income splitting if they didn't.
What they have announced though, is to tax distributions from discretionary trusts to adult beneficiaries at 30%. There are however, some issues:
1. This doesn't affect fixed trusts.
A fixed trust is a trust where the beneficiaries' interests are fixed according to the terms of the trust when it is established. Distributions from such trusts would still be taxed at the usual rate; so a person could establish a fixed trust to achieve income splitting. While this may lack the flexibility of a discretionary trust, in the sense that the trustee can't just give however much money to whomever, such a trust can include a power to amend its terms. This means if you want to change how the income is split among the beneficiaries, you simply amend the terms of the trust.
2. Taxing discretionary trusts at 30% means that they still get a tax break of up to 15%.
A quick perusal of Australia's personal income tax rate will show you that Australian residents pay 32.5% for every dollar of income earned between $37,001-$87,000; 37% for every dollar of income earned between $87,001-$180,000; and, 45% for every dollar of income earned over $180,000. That's a lot of tax people can still use discretionary trusts to avoid paying if you're setting the limit at 30%.
3. Wealthy people may start buying some farms for tax purposes
There's always jokes about wealthy people buying certain businesses for tax purposes. If you exempt farms, I imagine we could start to hear about some new farm purchases down the yacht club...
I'm sure there are other issues (such as using charitable trusts in cute ways), but these are the big three that immediately come to mind.
So, in the end, I don't think this policy is going to save anywhere near as much money as Labor are claiming it will. It is, at best, largely symbolic, and wealthy people and their advisors will continue to find ways to do what they've already been doing all along.
Sunday 30 July 2017
Friday 28 July 2017
Let's Dispel Some Trust Myths
In my last post I explained how family trusts actually work, and that the issue is one surrounding taxation; not the trust structure per se.
In this post, I explain why people saying trusts do more harm than good is deeply ignorant.
Firstly, from an international investment perspective, various jurisdictions (including Singapore and Hong Kong) have implemented laws liberalising their trust structures to make them more attractive for international investors, and thus draw greater wealth into their economies (in terms of fees regarding the creation and administration of such trusts): see here. These economies are highly sophisticated and would not alter their trust laws in such a way if they thought they weren't going to do well out of it. They see value in the trust; it's odd that we don't at the moment.
Secondly, the various evil ways that trusts are used equally apply to companies. For example, Dale Boccabella has stated that:
"There are a few other ways discretionary trusts are used. They are also used to frustrate creditors, people who are owed money by the beneficiaries of trusts.
Someone who is owed money by a beneficiary of a trust can’t go to the trust to settle their debt. This is the case even if the beneficiary has received money from the trust in the past and is likely to receive money in the future, after release from bankruptcy (having not paid their debts)."
Yes, but that's also true of a company. Indeed, what is seemingly forgotten is that part of the reason we have the modern company structure is because of the way businesses used the trust structure to achieve limited liability, which is often regarded as one of the great hallmarks of modern business, and what allowed commerce to flourish in recent centuries. So, why aren't we abolishing companies?
Lastly, a lot of the benefit of the trust structure can be replicated through a combination of contractual arrangements that would give rise to agency and bailment obligations. There's no possible way to police such arrangements, and if you took away the trust, that is exactly what people would have their lawyers create. At least trusts have to be registered with the ATO; and even if people are using them to legally minimise their tax, then the government can know about it.
Governments have tried to abolish the trust structure going back to the time before Henry VIII, and even his most famous effort, the Statute of Uses, was unsuccessful. There is a social desire for such a structure that divides the legal and beneficial ownership of assets, which has existed long before taxation ever became an issue. Recent calls that focus on this are therefore ignorant of the trust's history, its actual structure and overall functions.
In this post, I explain why people saying trusts do more harm than good is deeply ignorant.
Firstly, from an international investment perspective, various jurisdictions (including Singapore and Hong Kong) have implemented laws liberalising their trust structures to make them more attractive for international investors, and thus draw greater wealth into their economies (in terms of fees regarding the creation and administration of such trusts): see here. These economies are highly sophisticated and would not alter their trust laws in such a way if they thought they weren't going to do well out of it. They see value in the trust; it's odd that we don't at the moment.
Secondly, the various evil ways that trusts are used equally apply to companies. For example, Dale Boccabella has stated that:
"There are a few other ways discretionary trusts are used. They are also used to frustrate creditors, people who are owed money by the beneficiaries of trusts.
Someone who is owed money by a beneficiary of a trust can’t go to the trust to settle their debt. This is the case even if the beneficiary has received money from the trust in the past and is likely to receive money in the future, after release from bankruptcy (having not paid their debts)."
Yes, but that's also true of a company. Indeed, what is seemingly forgotten is that part of the reason we have the modern company structure is because of the way businesses used the trust structure to achieve limited liability, which is often regarded as one of the great hallmarks of modern business, and what allowed commerce to flourish in recent centuries. So, why aren't we abolishing companies?
Lastly, a lot of the benefit of the trust structure can be replicated through a combination of contractual arrangements that would give rise to agency and bailment obligations. There's no possible way to police such arrangements, and if you took away the trust, that is exactly what people would have their lawyers create. At least trusts have to be registered with the ATO; and even if people are using them to legally minimise their tax, then the government can know about it.
Governments have tried to abolish the trust structure going back to the time before Henry VIII, and even his most famous effort, the Statute of Uses, was unsuccessful. There is a social desire for such a structure that divides the legal and beneficial ownership of assets, which has existed long before taxation ever became an issue. Recent calls that focus on this are therefore ignorant of the trust's history, its actual structure and overall functions.
Wednesday 26 July 2017
The Family Trust
Since this week's political football is the family trust, which I happen to know a couple of things about, I thought I would dispel a few myths regarding what it is, and what I think is happening.
Firstly, there's no such thing as the family trust if we're just looking at trust law. A trust is simply a legally binding obligation that a person (a trustee) has to another person (a beneficiary) with respect to legal and/or equitable (if we're being technical) rights the trustee holds, which are the subject of the trust. This broadly describes every kind of trust that isn't charitable (and even then it is not much different).
So, if you're a beneficiary of a trust, then that means a trustee holds property, money etc. for your benefit. It belongs to you in an indirect way, and you may (depending on the terms of the trust) be paid income from it.
Also, there's no such thing as a trust per se. It's not a company that exists as a separate legal entity from its shareholders. If you're a beneficiary of a trust then it's more akin to a legal relationship, like a contract, between you and the trustee. It's not the same as owning a share in a company.
The result is that you don't necessarily own the trust property. If property is held on trust for you, then the trustee owns it and you are simply entitled to the benefit of it: your ownership is indirect; like if someone has promised that they are going to invest their own money but give you the profits of it. Yet the trustee doesn't really own it either because it's held for your benefit.
Further, a trust may also be structured in such a way that, while you are stated to be a beneficiary of the trust, so are a bunch of other people (such as members of your family); and, the trustee doesn't ever have to give you anything: he or she might decide to give some of the money from the trust to your brother or sister. This means the trustee has discretion as to who should, in reality, benefit from the trust; and that is why trusts structured in this way are often referred to as discretionary trusts.
So, if you may never receive anything from the trust, but the trustee doesn't derive any benefit from it either (the property is held for the beneficiary 's benefit, not the trustee's), who should pay tax on any income generated by the trust property?
Now you can see why they're so popular as, broadly speaking, they can only be taxed when a beneficiary has actually received a direct distribution from the trustee.
Yet this isn't the only reason why discretionary trusts have been so useful, nor why "family trusts" are such an issue.
When a discretionary trust is used in the family context then tax law allows it, for tax purposes, to be classified as a family trust. This is still the same discretionary trust I've been talking about, but when it is used by families, tax law allows people to claim all sorts of extra tax saving goodies.
You see then, the issue is not the trust itself but the way our governments have passed a bunch of tax laws that, especially in the family context, have rewarded and incentivised the trust's use purely for the purpose of minimising people's taxes.
That's why the solution to this latest political issue isn't to abolish trusts (and anyone who says so is truly ignorant as to the myriad of ways they are used, e.g. your superannuation fund is a trust), but to correct the tax laws that promote them being used in ways that are, at least now, regarded as socially unacceptable.
Firstly, there's no such thing as the family trust if we're just looking at trust law. A trust is simply a legally binding obligation that a person (a trustee) has to another person (a beneficiary) with respect to legal and/or equitable (if we're being technical) rights the trustee holds, which are the subject of the trust. This broadly describes every kind of trust that isn't charitable (and even then it is not much different).
So, if you're a beneficiary of a trust, then that means a trustee holds property, money etc. for your benefit. It belongs to you in an indirect way, and you may (depending on the terms of the trust) be paid income from it.
Also, there's no such thing as a trust per se. It's not a company that exists as a separate legal entity from its shareholders. If you're a beneficiary of a trust then it's more akin to a legal relationship, like a contract, between you and the trustee. It's not the same as owning a share in a company.
The result is that you don't necessarily own the trust property. If property is held on trust for you, then the trustee owns it and you are simply entitled to the benefit of it: your ownership is indirect; like if someone has promised that they are going to invest their own money but give you the profits of it. Yet the trustee doesn't really own it either because it's held for your benefit.
Further, a trust may also be structured in such a way that, while you are stated to be a beneficiary of the trust, so are a bunch of other people (such as members of your family); and, the trustee doesn't ever have to give you anything: he or she might decide to give some of the money from the trust to your brother or sister. This means the trustee has discretion as to who should, in reality, benefit from the trust; and that is why trusts structured in this way are often referred to as discretionary trusts.
So, if you may never receive anything from the trust, but the trustee doesn't derive any benefit from it either (the property is held for the beneficiary 's benefit, not the trustee's), who should pay tax on any income generated by the trust property?
Now you can see why they're so popular as, broadly speaking, they can only be taxed when a beneficiary has actually received a direct distribution from the trustee.
Yet this isn't the only reason why discretionary trusts have been so useful, nor why "family trusts" are such an issue.
When a discretionary trust is used in the family context then tax law allows it, for tax purposes, to be classified as a family trust. This is still the same discretionary trust I've been talking about, but when it is used by families, tax law allows people to claim all sorts of extra tax saving goodies.
You see then, the issue is not the trust itself but the way our governments have passed a bunch of tax laws that, especially in the family context, have rewarded and incentivised the trust's use purely for the purpose of minimising people's taxes.
That's why the solution to this latest political issue isn't to abolish trusts (and anyone who says so is truly ignorant as to the myriad of ways they are used, e.g. your superannuation fund is a trust), but to correct the tax laws that promote them being used in ways that are, at least now, regarded as socially unacceptable.
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