Submission No. 55 Back to full list of submissions
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The Trustee Corporations Association (the Association) welcomes this opportunity to provide a submission to the Committee of Review of Business Taxation (the Committee).

This Submission focuses on issues relevant to the proposed taxation of trusts as corporations.


The Association understands and generally supports the tax design principles expressed in the discussion paper, ‘A Strong Foundation’, as regards determination of tax liability.

The two principles of ‘integration of ownership interests’ and ‘single layer of domestic taxation’ are the basis upon which trusts in Australia are currently taxed. We welcome these policy design principles, and support their continued application to trusts generally.

However, the Association is concerned to ensure that, in its review of business taxation, the Committee is mindful of the unintended consequences which would flow from not continuing to apply these two principles to the taxation of trusts.

We are also concerned that the policy intention to tax trusts in the same way as limited liability entities ignores the true legal relationship which exists between trustee and beneficiary.


  1. Trusts are not limited liability entities, and to regard them as such inappropriately includes all trust relationships in the proposed taxation of trusts as corporations.
  2. Taxing all trusts as companies would have a dramatic negative impact on many Australian families, including widows, children and the socially disadvantaged, and would involve many negative, inappropriate and presumably unintended consequences in terms of the distribution of money.

  4. Currently, the general rule is that the net income of a trust is taxed either in the hands of the ultimate beneficiary or in the hands of the trustee; and, as such, trusts are largely tax transparent.

    Accordingly, where investments are held by trusts as tax transparent vehicles, the Review’s policy design principles are essentially met, namely:
  • there is an integration of ownership interests, where trusts are dealt with as extensions of their ultimate owners; and
  • the business income of a trust bears only a single layer of taxation.

We therefore strongly recommend the maintenance of the current taxation regime as it applies to trusts.

Potential Impact Of Including All Trusts In The Review

The Government’s ‘A New Tax System’ Statement indicated a policy intent to tax trusts in the same way as ‘limited liability entities’. To do so would be to ignore the true legal relationship which exists between trustee and beneficiary.

Trusts are not limited liability entities. They are not entities at all, in the same way that a company is a legal entity or person. Trusts are more like partnerships or agencies. Their assets are held on behalf of individual beneficiaries.

We do recognise, however, that in a limited number of cases trusts are used as vehicles through which trading activity is conducted, and therefore such trusts can be considered as part of a "Review of Business Taxation". However, the vast majority of trusts are not carrying on a trade or business, but rather maintain passive capital investments.

We believe that there is a need, therefore, to consider the definition of what constitutes a business entity deriving "business income". We submit that the definition of "business income’ is too widely drawn with the result that all activity conducted by trusts would be "caught". An unintended consequence of this is that virtually all trusts relationships would be considered under the Business Review Process.

For example, under the proposals as stated, the following would be taxable as companies:

  • testamentary trusts created by will, e.g. for the protection of minors, particularly orphans
  • deceased estates, including those where the surviving spouse is given a right of abode in the former principal place of residence
  • rural property trusts
  • compensation trusts for disabled and socially deserving cases
  • charitable trusts, including those established by corporations as philanthropic trusts.

Taxing these as companies would have a dramatic negative impact on many Australian families, including widows, children and the socially disadvantaged, and would involve many negative and presumably unintended consequences in terms of the distribution of money.

Maintenance Of Tax Transparency

The Association notes that individuals, partnerships and agencies are to be excluded from the Review process ¾ ostensibly because they are ‘tax transparent’.

We submit that trusts are similarly ‘tax transparent’.

In the vast majority of cases, trusts are merely conduits through which beneficiaries’ income and capital can be invested and maintained for the benefit of future generations or for the prudent management of assets during the beneficiary’s life.



Trust income is never untaxed: it is taxed in the beneficiaries’ hands or in the hands of the trustee, if undistributed, at the top marginal tax rate.

As tax transparent vehicles, trusts satisfy the Review’s policy design principles for determining tax liability, namely:

  • there is an integration of ownership interests, where trusts are dealt with as extensions of their ultimate owners; and
  • the business income of a trust bears only a single layer of taxation.

We strongly recommend the maintenance of the current taxation regime as it applies to trusts.


We submit that ‘private’ trusts are already satisfying the two main policy design criteria for determining tax liability. The economic ownership and control of the relevant trust income and property is required to be identified and reported by trustees. We believe therefore that any tax reform affecting trusts should allow the responsible and proper use of trusts which protect the disadvantaged.

We submit that the cause of taxation reform will actually be damaged by the undue impact that this proposal would have on those Australians who are currently well serviced by trusts established for the purposes of protecting the disadvantaged.

We quote from the 9.9.98 Media Release of the Association’s National Director, Ms Kerrie Kelly:

  • "Efforts to increase the tax take from trusts as an end in itself will hurt those people who have a legitimate use of trusts and have the right to expect a level of protection in our legislation."
  • "Many trusts are created for legitimate purposes to look after the interests of Australians who must rely on others and who will otherwise not have adequate financial protection."

The following are examples of uses of trusts:

  1. Protecting the interests of minors, particularly orphans, under a will.
  2. Ensuring that assets are eventually handed over to natural, or nominated, children of a marriage following a divorce.
  3. Protecting the long term interests of disabled people to ensure that assets are secured for their future use.
  4. Protecting the proceeds of court cases arising from workers compensation and criminal injury matters.
  5. Protecting the interests of minors arising from compensation as a result of personal injury claims.
  6. Charitable trusts established for the benefit of recognised charitable purposes.


In particular, the Association’s Public Trust Office members emphasise that:

  • their client base includes many relatively low value trusts often managed as community service obligations;
  • trusts are used for a very wide range of purposes, often in connection with deceased estate administration and protected persons, none of which involve artificial or contrived tax avoidance as a key objective;
  • the inclusion of all trusts in the Review will:
  • involve proportionally high costs for many low income earners and minors, who will now have to lodge taxation returns in order to receive franking credits in situations where they otherwise don’t meet the relevant income thresholds;


  • compromise the trustee’s ability to maintain the purchasing power of long term estates, including for severely disadvantaged persons.

The Association submits that:

  • with the assistance of those both within and outside of Treasury with relevant skills and expertise, the Government could develop a taxation regime recognising different categories of trust, and that, by this means, could encourage proper asset protection of the disadvantaged who depend on income from trusts for their welfare and, in some cases, survival;
  • reform should recognise those categories where the purposes of trusts are proper and legitimate, i.e. these categories should be exempt from, or acknowledged in, any blanket legislation.


The Association does not suggest the exclusion of managed funds and collective investment schemes carried on by public trusts from the business tax review process. However, we do have concerns regarding their proposed treatment and its impact not only upon public unit trusts, but upon Australia’s broader ability to remain a Regional Financial Centre.

Imposing an additional layer of ‘deferred company tax’ will have dramatic negative impact on unit trust distributions. It will also involve many other adverse consequences which will diminish the competitiveness of managed funds compared to other forms of investment. In addition, it will retard the growth of managed investments, to the disadvantage of individual savers and retirees, and of the national economy.

We believe that the proposal will also indirectly affect investor’s returns and increase product pricing, given that the increase in administration required will add additional layers of unnecessary costs.




The Association does not detail the problems here, as we believe the Investment and Financial Services Association (IFSA) and others have done so, but we would be happy to provide further information if required by the Committee.

To stay competitive in attracting global funds, we should seek to continue best practice, not abandon it! In the UK and US, trusts have been developed as business and investment vehicles which are treated for tax purposes as tax transparent, for reasons including:


  • recognition that the income is essentially serviced not by business entities, but by ultimate owners of the income
  • such treatment avoids the introduction of a separate taxation layer, such as the proposed ‘deferred company tax’
  • it does not distort business and investment decision-making, and helps keep capital in Australia.

We estimate that any reform of the taxation of trusts to treat managed investment funds and other public collective investment schemes as companies may lead to the emigration of a substantial proportion of the $200 billion of investment capital from Australia. Both local and overseas investors, faced with additional ‘deferred company tax’ will base decisions upon the after-tax return to them of distributions from their investments. This will seriously undermine Australia’s standing as a Regional Financial Centre, and send businesses offshore, resulting in a loss to Australia’s domestic product and wealth.


The Association is concerned that the proposed taxation treatment of trusts will result in an exodus of public and private trust property abroad into the hands of foreign trusts, e.g. located in the Cook Islands or Nauru.

The Trustee Corporations Association:

  1. seeks to alert the Government, the Australian public and the Committee to the potential adverse consequences of ‘catching’ all trust relationships in the proposed taxation of business entities (when trusts are not separate legal entities);
  2. calls for urgent detailed public consideration of the potential adverse consequences flowing from this policy, especially in relation to public trusts and non-trading private trusts, before final policy decisions are made; and
  3. calls on the Committee to point out to the Government the conflict between its stated principles and their application in the sweeping proposal to tax all trusts as corporations.

The Association offers its assistance in building upon earlier inquiries (e.g. Asprey Committee which accepted the principles of tax transparent or conduit treatment to trusts and partnerships alike) and in developing arrangements which can meet the Government’s Taxation Principles without compromising the interests of the disadvantaged, of small business, of the retirement savings and investment industry and, ultimately, of our nation’s economic health.