The Australian Taxation Office commissioned the Royal Melbourne Institute of Technology to research tax issues involving trusts. They estimated that by 2022 there will be more than one million trusts operating in Australia. This growing number of trusts has created the opportunity to exploit a mismatch between income for tax law purposes and income under trust law. RMIT argues that “the interactions between the trust and tax laws are being manipulated, which could contribute to the sheltering of significant amounts of tax. Inconsistencies between trust and tax income definitions can be used to shelter income from higher rates of tax.” The report has found that over the past six years the Tax Avoidance Taskforce had raised more than $1.2 billion in liabilities and collected more than $467 million in relation to trusts. The ATO says recent investigations reveal the ease with which wealthy taxpayers can utilise trusts in private groups and reduce their tax liabilities. The RMIT report says: “Anti-avoidance provisions may not be sufficient to deal with common cases of income tax shuffles, and such arrangements can be easily enacted by taxpayers.”
Shadow Treasurer Chris Bowen is hoping Labor’s new proposed trust tax would eliminate these “tax loopholes” which are costing the budget ““billions of dollars through tax, avoiding income tax shuffles including income splitting via beneficiaries.” The new reforms would introduce a minimum 30% tax rate for discretionary trust distributions to adults and could also include a withholding tax regime similar to that in place for salary and wage earners or taxing the trust or trustee as an entity and maintaining the current flow through features of trusts.