The Common Law and Taxation of Trusts in Australia in the Twenty-First Century

Abstract

This paper proposes that the concept of the ‘trust’ held for over a thousand years under the British legal system is drawing to a close. Education and Legislation is heralding the demise of that ancient and noble institution in the Australian context. The Paper puts forward various alternatives and solutions to the identified problems. The term ‘trust’ by definition expresses honour, reliance, justice and friendship. It implies an honourable relationship under which the property of one, the beneficiary, is placed in the control of another, the trustee. The Knights and Barons of Medieval England did not trust their descendants to manage their titles in a favourable fashion but suspected they would slowly but surely allow the decay of property that the barons had fought long and hard to establish. Various types of trust have come to be recognised in modern law. In modern times the focus of trusts has shifted somewhat from the preservation of property to the alienation of income and hence taxation. Australian taxation law has continued to attempt to tax the income and property of these trusts with varying degrees of success. Series of Australian Governments have enacted and proposed legislation to pierce the trust structure and tax the income in the hands of the beneficiaries. Where the beneficiaries cannot be taxed the trustee is responsible for the tax. For trading purposes trusts are no longer the optimum business structure. The previous taxation benefits of income splitting (and thereby reducing individual taxation burdens) are coming to an end. Trust income arising from personal exertion, whereby income earned by an individual is attempted to be transposed into earnings of a trust, has been vigorously attacked in recent years. The problem is that it is difficult to distinguish between a ‘genuine purpose’ and a ‘tax avoidance one’. As beneficiaries are becoming more legally aware they realise the property of their parents has been transferred to them. Parents are being faced with either having to relinquish ownership and control of ‘their’ property or admit that the structure is simply a means of avoiding tax.