Australia’s high-wealth individuals are using trust structures to avoid tax, with the sheltered amounts considered to total up to $1.2 billion.
An Australian Tax Office-commissioned report has blown the whistle on the use of trusts by wealthy Australians to reduce their tax exposure, finding between $672 million and $1.2 billion is sheltered each year, as first reported by the ABC.
Released to the ATO in 2017 for internal purposes and later revealed publicly after a freedom-of-information request, the RMIT report warned reducing the corporate tax rate could exacerbate the situation.
Because income from trusts is usually taxed at the 30 per cent corporate tax rate, high-wealth individuals with marginal income tax rates of 45 per cent can use trusts to reduce their tax.
The report also suggested that the number of Australian trusts will exceed 1 million, and said trusts are a defining feature of the Australian economy.
But the reported noted “taxpayers can derive income from trusts in convoluted ways in order to defer, reduce or extinguish tax liabilities”.
Its analysis found that multiple trust structures can make it difficult for the ATO to identify the multiple beneficiaries, as can income tax shuffles that exploit the different definitions under tax and trust law to minimise tax exposure.
“These findings demonstrate that orchestrating income tax shuffles can be particularly advantageous for high wealth individuals. Further, some of these schemes appear to be (deliberately) complex.”
A reduction in the corporate tax rate would serve to make the use of trusts for tax minimisation even more appealing, the research found.
“The majority of participants conceded that the disparity between the top marginal tax rate and the company tax rate is a significant motivator for the use of trusts,” the researchers told the ATO.
“For those taxpayers who have sufficient wealth and/or income that may be subject to the top marginal tax rate, there is an incentive to set up structures that involve companies and trusts so as to be able to accumulate (and in some circumstances distribute income) wealth at a lower tax rate of 30 cents on the dollar.”
Labor’s proposed changes
The federal Labor Party plans to set a minimum 30 per cent tax on distributions from discretionary trusts should it win at the coming election.
“Labor’s reforms to the taxation of trust is simply an extension of John Howard’s work as treasurer, in seeking to apply a minimum standard tax rate of 30 per cent to discretionary trust distributions to beneficiaries over 18 years of age,” shadow treasurer Chris Bowen said Friday.
“Misuse of trusts has been potentially costing the budget billions of dollars through tax avoiding ‘income tax shuffles’ including income splitting via beneficiaries.”
Josh Frydenberg’s defence
But the treasurer doesn’t buy it.
“Trusts have been a feature of the legal system since Roman times. They play an important part in our tax law, enabling a trustee to hold assets on behalf of others,” Josh Frydenberg said in an opinion piece for The Australian.
He accused Labor of using “class-warfare rhetoric” to win votes.
Australia has third-highest corporate tax rate in the world
After Costa Rica and Chile, Australia has the third-highest corporate tax rate in the world, a new report from the OECD has found.
The report found that Australia depends on corporate tax collections to pay for government services more than similar-wealth countries, with more than 15 per cent of revenue coming from the corporate sector.
That’s around 90 per cent higher than the OECD average.
“Now is the time for our political leaders to examine other options like investment or depreciation allowances,” Business Council of Australia chief executive Jennifer Westacott said in response to the report.
“Doing nothing to shore up the competitiveness of our economy means surrendering our destiny. It would leave Australia and Australian workers at the mercy of gathering global economic headwinds.
“The OECD also reports that businesses deliver 16 per cent of all the budget revenues needed to fund the services and projects that matter – one of the highest shares in the developed world. More profitable businesses pay more company tax.”
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.