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NEWS - PLANNING
The truth about trusts
6/6/2002
Ask a financial adviser whether trusts are a legitimate financial structure, and they will invariably say yes.
But ask them whether they are a good way to minimise your tax, and the answer isn't as clear.
Arnold Bloch Leibler senior partner Mark Leibler says it is wrong to assume trust structures are always tax driven.
"The reality is quite to the contrary," he says.
"Beyond limited income splitting - which mainly benefits lower income earners - there is little tax advantage.
"It's true that in the past some wealthy people paid little tax, but that's often attributable to the fact that they held pre-capital gains tax investments, combined with the high interest rates of the 1980s which produced large carry forward losses."
Blake Dawson Waldron partner, Phillip Wiseman, agrees.
"To suggest no one with a trust is paying tax is totally erroneous - either the trustee pays tax or the beneficiaries pay tax," he says.
"Trusts are a useful social tool, but there are set up costs and recurring costs, like extra tax returns to prepare.
"It comes down to a cost-benefit analysis."
DBA Butler principal Daniel Butler, says there are actually some tax disadvantages to trusts.
"You have to distribute your income every year, for example, because if you accumulate it in the trust you will pay tax at the top marginal rate," he says.
"Whereas you can accumulate funds in a company at 30 per cent. You also need to make a 'family trust election' or you could lose both tax losses [earned by the trust] and franking credits on shares acquired since December 1997."
Butler says the definition of a family trust is limiting, being basically restricted to two generations on either side of a specified individual.
There is no provision for same sex couples to be considered part of the family group, and some difficulty over issues such as ex-spouses.
"You could pay top rates on [distributions to] anyone outside the family group, and the family group is defined very restrictively," he says.
"Once you take into account the state taxes [on property owned by the trust] and extra administration, for many people it won't be worth it."
But advisers agree one key advantage to using trusts as an investment vehicle is asset protection and intergenerational transfers.
"Trusts don't die so you don't have problems with probate," says Wiseman.
[Probate] doesn't take as long as it used to but it's still an issue."
Butler says increasing rates of family breakdown often lead people to use trusts as asset shelters, rather than tax shelters.
"Partnerships and individuals can also distribute tax free gains," he says.
"In an increasingly litigious society, with high divorce rates, it is often for the flexibility [in holding assets] that the trust might win out."
Advisers are adamant that any changes to the taxation of trusts, including any plans by the Federal government to revive it's ill-fated entities tax legislation, must be clarified sooner rather than later.
Leibler says people's views of trusts as avoidance vehicles stems from aggressive campaigning by Treasury and the Tax Office.
"There are elements in the ATO who have tried to create this atmosphere of hysteria," he says.
"I think eventually the Board [of Taxation], whatever it proposes, will have to be targeted and limited."
In a sign that the Government has not given up completely on some kind of trust crackdown, the Board, headed by Sydney businessman Dick Warburton, has been charged with reviewing the current tax treatment and coming up with a proposal on new tax arrangements, which it expects to hand to government later this year.
The ALP has already given conditional support to taxation changes for trusts, provided they are targeted to specific transactions.
The Government's earlier legislation, which stemmed from a recommendation in the 1999 Ralph Review of Business Taxation, was roundly criticised by business, tax experts and farming groups alike.
Pressure from the National Party in the lead up to last year's federal election forced the Government to drop the proposals.
"The regulations they proposed were so bad no one took them seriously," says Butler. But the uncertainty that is out there still needs to be clarified."
Leibler says it is difficult to get critics of trusts to point out specific problems.
"There is only one area that I think could be of legitimate concern, and that is when the trust claims deductions for interest on borrowings that are used to fund payments from reserves," he says. "Beyond that I'd like someone to point out the great evil supposedly in trusts."
Wiseman agrees. "If they aren't to stop specified evils, let them come up with specific measures," he says.
Wiseman says one reason the ATO doesn't like trusts is because they don't know exactly how many are out there.
"Only trusts that derive income lodge returns," he notes.
"Treasury doesn't like them either and has been trying to get rid of them for years, but the fact is, they've been around since the time of Henry VIII, and aren't likely to go anywhere."
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