“Whatever real tax ‘loopholes’ that previously might have existed in relation to the use of family trusts are well and truly gone,” says Brian Hor from Townsends.
Calls for family trusts to pay full capital gains tax amid estimates that revenue leakage associated with such trusts tops $1 billion a year are misguided, according to Brian Hor, Special Counsel (Superannuation & Estate Planning) with Townsends Business & Corporate Lawyers.
Whilst family trusts may be viewed by some as a key way in which wealthy Australians engage in aggressive tax planning, calls for access to the 50 per cent CGT discount by trusts to be phased out ignore the fact that family trusts are merely “look through” structures from a taxation perspective. It is the end recipient of a capital gain who may or may not be able to utilise the 50 per cent discount, depending on their own tax circumstances.
Furthermore, there have long been in place a plethora of tax laws that restrict the tax effective use of family trusts. Longstanding tax laws have addressed the splitting of income attributable to personal exertion rather than legitimate investment income (Part 2-42 of the Income Tax Assessment Act 1997), or the distribution of income to minor children beneficiaries (Division 6AA of Part III of the Income Tax Assessment Act 1936, with penalty tax rates of up to 66%!), or the accumulation of unpaid present entitlements of corporate beneficiaries (Division 7A of Part III of the Income Tax Assessment Act 1936).
Plus, with few exceptions any undistributed income of family trusts is automatically hit with the top marginal tax rate! (section 99A of the Income Tax Assessment Act 1936). Truly, whatever real tax “loopholes” that previously might have existed in relation to the use of family trusts are well and truly gone. People who say that the income tax treatment of family trusts has trouble passing the “smell test” need to get their noses checked!
The modern reality is that in most circumstances family trusts are used as legitimate estate planning structures (particularly for farmers) and asset protection structures for allowing small business entrepreneurs to “have a go” by lessening the prospect of losing all their personal assets if things don’t turn out as planned. Any incidental taxation benefits associated with such use could also be achieved with the use of other structures such as private companies or partnerships.
It is also inappropriate to point to very large trusts, such as the Hope Margaret Hancock Trust, which is believed to be worth about $5 billion, as examples of family trusts allegedly rorting the tax system, since clearly such trusts are the exception rather than the rule.
On another front, calls to treat death as a “realisation event” for capital gains tax purposes to supposedly diminish the ability to pass major wealth across generations untaxed again ignore the fact that death results in a person’s estate beneficiary merely taking over the deceased’s tax position in relation to CGT rather than rendering any assets untaxable. Indeed, a major consequence of death is that all pre-CGT assets of the deceased person are automatically brought into the CGT taxing net upon their death. From this perspective, CGT is actually the replacement for the old death duties.”
Media enquiries:
Brian Hor
Special Counsel, Estate Planning & Superannuation
Townsends Business & Corporate Lawyers
(02) 8296 6203 | 0401 122 338
Twitter: @TownsendsLaw
brian[at]townsendslaw.com.au
townsendslaw.com.au