By 2022, it is expected that over 1 million trusts will exist in Australia. As part of its ongoing program of work as a member of the multi-agency Tax Avoidance Taskforce, the Australian Taxation Office (ATO) commissioned the Royal Melbourne Institute of Technology (RMIT) to conduct independent research and provide an additional perspective on tax issues involving trusts, to assist in the development of mitigation strategies to address trust mischief.

The report, ‘Current Issues with Trusts and the Tax System’, analysed income tax shuffles, complex distributions, non-lodgment and lodgement trust patterns, transparency, other common law jurisdictions (US, Canada, NZ), unauthorised legal practice and practitioner perspectives.

Study highlights

  • The study finds that interactions between the trust and tax laws are being manipulated, which could contribute to the sheltering of significant amounts of tax. At conservative levels this amount is estimated to be between $672 million and $1.2 billion per annum.
    • Distributions to company beneficiaries accompanied by franking credits to permanently limit the tax liability and cap the tax rate at 30%. On average, ‘loss-making’ company beneficiaries received 22% of trust total distributions, while ‘non-loss-making’ company beneficiaries received only 14%.
  • Chains of trusts and interlinking trusts are common, which may reflect a deliberate intent to create a degree of opacity with relation to trust income.
    • Multiple trust structures, questionable present entitlements, association with income tax shuffles and income re-characterisation are four key traits of complex distributions used to defer, reduce or extinguish tax liabilities.
  • Trust tax lodgment patterns differ according to trust type, however these are difficult to ascertain given the current level of information available.
  • The current system of trusts presents significant challenges in implementing international transparency obligations and recommendations.
  • Australian trust taxation law is remarkably different from other common law jurisdictions.

ATO response

The Australian Taxation Office expressed disagreement with some aspects of the findings and the methodology of the study.

(Source: ATO – Taskforce | Report).

Comments are closed.