Labor's Trust "Reforms"

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.