Why We Use Private Trusts in Australia: The Income Tax Dimension Explained

Abstract

The trust has become a pervasive vehicle in the Australian economic landscape. In 2015–16, returns were lodged with the Australian Taxation Office for 845 925 trusts and the total reported business income derived through trusts was $368 billion. There has been enormous growth both in the number and use of private trusts since the late 1970s. Although the markers have been evident for decades and were appreciated in practice, private trusts did not feature heavily in Australian academic literature until more recently. Many of the existing analyses have broadly described that tax settings contributed significantly to the trust’s popularity in both the public and private contexts. However, to date, none have clearly explained why the income tax settings acted as an accelerant for the movement towards private trusts. This article is novel as it explains the material income tax settings and correlates changes in those settings with statistical data that evidences that movement. The article argues that discretionary trusts have become popular, at least partly, because of favourable income tax treatment. The article sets out shortcomings of the Australian Labor Party’s 2017 proposal to change the rules for taxing discretionary trusts and recommends two directions for future reform efforts by either major political party.