ACOSS welcomes the announcement of Treasury consultation on draft legislation to reform the taxation of discretionary trusts as an important step closer to implementing these long-overdue reforms to improve fairness and integrity in Australia’s tax system.
The draft legislation introduces a minimum 30 per cent tax on discretionary trust income, helping to close a longstanding gap that allows people on high incomes to contribute substantially less than the average worker to our shared revenue base and the essential services and supports we all rely on.
ACOSS strongly supports the broad direction of the reforms and will now carefully review the details of the draft legislation to ensure it strengthens fairness and integrity in the tax system.
“This reform is about fairness. It’s not fair that someone earning $200,000 or more, who would typically contribute tax at a rate of 47 per cent, can reduce their rate to below 30 per cent by channelling income to their adult children or a private company through a discretionary trust. This reform helps fix that,” CEO of ACOSS Dr Cassandra Goldie said.
“Workers on lower wages contribute tax in every pay packet and do not have the same opportunities as high earning investors to split their income and bring their tax rate down through complex structures. This reform is an important step towards ensuring everyone contributes their fair share.”
ACOSS said the reforms will also raise much-needed revenue that should be invested in the essential supports and services communities need.
“The current tax settings deprive governments of the revenue they need to fund the essential services we all rely on,” Dr Goldie said. “Every dollar lost through discretionary trust tax avoidance is a dollar our government does not have to invest in healthcare, income support and housing that people can genuinely afford.
“Once implemented, these reforms are expected to raise around $4.5 billion by their second year of operation and more in the years following – revenue that should be directed towards meeting growing community needs and strengthening the services people rely on throughout their lives.”
Trusts and private companies can serve legitimate purposes, like holding assets in trust for family members after someone dies, limiting business liability and protecting assets.
But they are also widely used by investors and business owners to avoid contributing their fair share of tax, with the Australian Tax Office warning about trust-based tax avoidance for decades.
“It’s clear many of these arrangements exist primarily to minimise tax. Over 80% of companies receiving trust distributions have no evidence of business activity whatsoever,” Dr Goldie said.
“Too many people are being encouraged into complex structures that are costly to administer and add little economic value. This is unproductive and wasteful, and the costs are ultimately borne by the wider community.
“Many people will not understand everything about how trusts work, but they do understand fairness. These reforms help ensure that people with high incomes cannot use trusts to pay less tax than an average worker, and ensure they contribute their fair share to the services we all need. They are long overdue and deserve broad community support.”
Key facts:
- Australia has around 840,000 discretionary trusts and more than 1.1 million private companies
- In 2022, more than a trillion dollars in assets ($1,130 billion) were held in discretionary trusts used for passive investment
- Around 90 per cent of private trust wealth sits with the wealthiest 10% of households, those with net worth above around $2.3 million
- 63% of all trust income (around $40 billion) goes to the highest 10% of income earners, whose average taxable income is $258,000
- People earning more than $1 million a year receive around a quarter of their income through a trust or partnership, compared with just 4% for those earning between $60,000 and $150,000
- Among people on around $200,000, 29% reported private trust income in 2022-23, averaging $64,900
