‘I found that wild’: Tax adviser ‘astounded’ by academics’ views on trusts

“The impression anybody who uses it is guilty by design and we need to kill them. Essentially, anyone who’s going to suffer a cost from doing that is a cost that the witnesses were willing to accept. My impression was that you could have put almost anything in front of those witnesses that attacked discretionary trusts and they would have supported it.”

Quayle said their testimony focused on attacking discretionary trusts rather than scrutinising the bill before them, evaluating it in a proportional and measured manner, and determining if the bill should pass parliament.

While he underscored that he does not support and will not defend income splitting strategies that some taxpayers deploy, he said the bill reaches beyond curtailing income splitting.

Quayle said targeted measures are required to prevent income splitting, but that is a different issue.

On the second day of the Senate Economics Legislation Committee hearing on the proposed minimum 30 per cent tax on discretionary trusts, academics said the trust vehicle was “totally tax-driven”, expensive, and unfair, adding that the reforms were long overdue.

UNSW School of Accounting auditing and taxation associate professor Dale Boccabella told the committee that it is “nearly impossible” to get a fair amount of tax out of those who use discretionary trusts.

Dr Kathryn James, associate professor at the Melbourne Law School, said: “A bucket company might sit there holding money until it can distribute its profits as dividends with franking credits at a time when family members might have a lower rate of tax, once they’re in retirement. It can really be used over a longer term to essentially really minimise the tax burden.”

However, Quayle said he was concerned about how many academics supported double taxation of corporate beneficiaries because they perceived the trust to be a tax-advantaged structure.

“I found it astounding for academics to come to that view. I found it wild,” Quayle said.

“How is double taxation and taxation of up to 70 per cent defensible even if you’re trying to achieve a certain outcome? To hear these academics support double taxation blew my mind.”

Dr Sonali Walpola, associate professor at the ANU College of Business and Economics, stressed during the hearing that discretionary trusts were used by the wealthy for tax minimisation.

“The inclusion of corporate beneficiaries in discretionary trusts overwhelmingly – maybe nearly 100 per cent of the time – is used purely to cap residual trust income at the corporate tax rate,” she said.

“It’s for this reason that one of the leaders in our discipline said at a conference that, for the mega rich, the highest tax rate is not 47 per cent; it is the corporate tax rate, because wealthy Australians use trust structures to reduce their tax.”

However, Quayle argued that there were two key mischiefs that were identified in the trust vehicles, but they have already been addressed.

“The mischief that was identified with bucket companies is that you’ve got cash that can stay in the trust. You’ve got the trust distribution that goes to the bucket company but the cash stays in the trust. It can be reinvested. Before the capital gains tax measures, you’re getting the capital gains tax discount,” he said.

“Whereas if those funds went to the company, then they’re not entitled to the discount. Now that that gap has been closed as a result of these capital gains tax measures. That’s not a mischief point.

“The second one is that you’ve got funds that can stay in the trust even though they are company funds and not considered a loan. Division 7A otherwise applies. Now, as we saw in the High Court case in the Bendel judgment where the ATO lost that one, the government’s already signalled that they’re going to be introducing targeted rules to address that. That’s another mischief that’s going to be closed.”

Quayle said there would be buy-in from tax professionals and other stakeholders to reform discretionary trust tax rules if it were done in a more straightforward way over a longer timeframe with more consultation.

“What we’ve had here is no messaging pre-budget around these discretionary trust changes, and then we’re told that this is what’s happening, too bad,” he mused.

“Despite all the short-form consultation and the very minor tinkering that was done, that’s the outcome that we got to. I think good tax reform requires an extensive look from a policy perspective before you even put pen to paper.”