Taxman prepares to crack down on trusts

The tax office is set to launch a major review of Australia’s complex trust laws, which could force business owners and wealthy entrepreneurs to pay big tax bills.

It is the first major review of Australia’s trust regime in a decade. According a report in The Australian Financial Review, a confidential tax office draft practice statement has been circulated among tax advisers for comment.

It appears discretionary trusts are at the centre of the review. Peter Bembrick, tax partner at HLB Mann Judd, says discretionary trusts are often used by SME business owners and wealthy families as a vehicle to hold assets in a tax effective manner.

He also says discretionary trusts are an effective vehicle for protecting assets in the event of a company collapse and are important in succession planning, as trusts make it easier to pass assets from one generation to the next.

“Asset protection is a huge issue and if people are saying, ‘how do I hold these assets’ then a discretionary trust has a lot of advantages in that respect.”

One of the things that makes discretionary trusts so tax effective is the ability to stream different forms of income in different ways. For example, income from a rental property held by a trust might be streamed to a company, to take advantage of the 30% tax rate for companies. But the capital gains from the sale of an asset held by a trust might be streamed to an individual, to take advantage of the 50% capital gains discount enjoyed by individuals.

It is believed that this capital gains streaming will one of the tax office’s particular targets.

Another potential target is the use of trust distributions to charities, which have tax-exempt status. Bembrick says any crackdown on the misuse of charities for tax avoidance is understandable.

He says SMEs and high-net-worth individuals need to watch the tax office closely for any potential changes to trust regulations or interpretations.

“For the SME market and family wealth, any changes they make in relation to trusts is definitely going to have an impact.”

Related story:

•·          20 tax tips from the experts