Trusts: Questions asked about budget moves

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The Government has attempted to address everyone’s concerns about trusts income splitting with minors, but questions remain.

Friday, June 30th 2000, 12:00AM

by Philip Macalister

Trusts have been around for centuries and are an option for individuals to consider when reviewing their estate plan. With the private individual being supplied with more information and being better informed about trusts there have been a large number settled over the last 10 years. In some instances trusts have been settled for the wrong reasons.

Trusts should not be set up for the sole purpose of gaining taxation savings (to do so invites the Inland Revenue Department to invoke anti-avoidance provisions). Tax savings may arise out of setting the trust up but it should not be the primary reason for the creation of the trust. Some examples of the primary reasons for creating a trust are:

• Management of assets for a person with a disability
• Protection and preservation of assets for future generations
• Protection of assets from matrimonial/defacto property claims
• For charitable purpose
• Protection of assets from creditors or other claims
• Providing for education.

The current proposal by the Government to tax distributions of beneficiary's income to minors at 33 per cent seems to suggest that the Government considers a number of trusts set up over the last 10 or so years have been set up primarily for income splitting purposes. The main advantage of income splitting is a reduced taxation liability.

As indicated by the discussion paper issued by the Government "Income splitting can occur within a family unit when taxpayers allocate income to other members of the family who face lower marginal tax rates, in order to achieve tax savings. This may involve a person transferring income-producing assets to a trust. The income arising from that asset is then distributed as beneficiary income to minors who are on a low marginal tax rate. This income is often, in substance, not income of the children."

Even though the Government has attempted to answer everyone’s concerns within the discussion paper (including the exception rules and the definition of a minor) the following points still need to be raised:

• Why has the vehicle of trusts been targeted rather than a review on the entire tax system?
• The overall effect of this proposed legislation is to increases taxes, which the Government had indicated they were not going to do (except in the case of higher income earners).
• This proposed legislation brings in another level of complexity to the taxation of trusts, which will in due course probably mean increased costs for the administration of trusts.
• For an estimated $10-$15 million extra revenue (paltry when compared to the total Government revenue of $38 billion) the extra compliance and enforcement costs must reduce any great benefit deemed to be gained from these measures.

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