The Reality of Family Trusts and Tax in Australia: What Labor Gets Wrong

The claim that Family Trusts remain a vehicle for tax avoidance in Australia is simply out of date.

Successive governments have already closed many of the loopholes, and today there is often no meaningful tax advantage to using a Family Trust structure.

In fact, in some cases, Family Trusts can now create a tax disadvantage compared to other business structures.

The erosion of Family Trust tax benefits happened gradually over time:

• The Howard Government introduced a 66% tax rate on Trust distributions to minors above $417, effectively ending the practice of splitting income with minors.
• Legislation was then introduced requiring Personal Services Income (PSI) to be attributed back to the individual who earned it and taxed at their marginal tax rate, closing that avenue entirely.
• Trust distributions can only be made from profits generated by business assets, and once an individual receives more than $45,000, their marginal tax rate exceeds 30% — the same tax rate applied to companies of 25% or 30%. So no particular advantage of a Trust over a Company
• This is precisely why many Family Trusts distribute to a “bucket company” to cap tax at either 25% or 30% the same as a trading company.
• However, when the individual eventually draws that money out of the company, they pay additional top-up tax, bringing them back to their normal marginal tax rate anyway.
• In practice, this is often no different from simply trading through a company structure in the first place.
• Finally, rules were introduced requiring paper distributions to be backed by actual cash payments, removing one of the last remaining structural benefits of Trusts.

The result is that Family Trusts today generally carry no meaningful tax advantage over a standard trading company, and in many situations may even produce a worse outcome.

Most Family Trusts are now established for legitimate non-tax reasons such as:

• Asset protection
• Estate planning
• Business succession planning
• Investment flexibility

Labor’s proposed 30% tax on Trusts would shift Family Trusts from “no meaningful tax advantage” to an “active tax disadvantage” in some cases

Some critics argue the policy would impose significant costs on taxpayers without raising any meaningful revenue for the government, including potential stamp duty costs, who established these structures in good faith, potentially forcing many to unwind them unnecessarily.
 

In Summary

Family Trusts:

• Are taxed at 47% if profit are not fully distributed.
• Profits are therefore fully distributed to individuals taxed at their own rate of tax.
• Profits distributed to a Bucket Company taxed at either 25% or 30% so no advantage over a trading company
• Profits can be distributed to an individual up to $45,000 (where tax rate is below 30%) but this is isolated to business profits or investment profits but is limited until adult children start earning their own income which then puts them above a 30% tax rate.
• Many critics question whether the changes has any significant net benefit after costs of implementing these changes.

This appears less like considered tax reform and more like an ideological response to the outdated belief that Family Trusts are primarily used by wealthy Australians to avoid significant tax.

Under current Australian tax law, the evidence simply does not support that view.