1. Issues in taxation of companies and trusts
Michael Walpole

2. Objectives How taxing such business vehicles works
The issues this raises
Stepping off point for discussion

3. Companies Widely used for routine commercial reasons
Limitation of liability
Certainty for investors
Clear, established rules and outcomes
Some ASIC scrutiny
Complex structures possible – some complex tax rules
Eg consolidations rules

4. Companies Taxed at a flat rate of 30%
The general 50% CGT discount is unavailable (but small business discounts may be)
Sundry anti avoidance measures e.g.
div 7A
loss trading and c’fwd measures
share value shifting etc etc

5. Companies Getting money out Franking credits Salaries and fees
Dividends
Franking credits
Dividends carry credits reflecting the (30%) tax paid by the company
Included in shareholders’ income
But tax obligation reduced by the credit
Can lead to tax refund to the shareholder
Not available to non resident shareholders

6. Companies The problems people see
30% is all that is paid on undistributed profit
Incentives for locking profit into companies
30% is much more than (e.g.) Singapore (18%); China (25%); Hong Kong (17%)
But close to others – UK (30%) US (40%)
World trend in company rate is down (KPMG Corporate and Indirect Tax Rate Survey 2007)

7. Corporate Tax Rates ASPAC 1997 - 2007
Source: KPMG Corporate and Indirect Tax Rate Survey 2007

8. Corporate Tax Rates OECD 1993 - 2007
Source: KPMG Corporate and Indirect Tax Rate Survey 2007

9. Taxing trusts Which trusts?
Many types
Focus on discretionary trusts
Getting money out – salaries or distributions
Main tax benefit is income splitting
(tax deferral through retention not a big issue)
Attractiveness lies in
Some shelter from creditors (like co’s)
Flexibility
Estate and financial planning
Income for orphans etc

10. Taxing trusts
Just how popular are they?
2006/7 609,915 trust returns (+7.1% on 2005/6)
461,073 (75.6%) of lodging trusts were discretionary trusts
They account for Owen Covick’s ‘two nations’
See “Put not trust(s) in tax reform: rather do the opposite”

11. Source of income – Discretionary Trusts 2006/7
Source of income disc trusts
No.
% of all disc trusts
Investment
238,008
51.6
Trading
186,105 40
Service - management
39,960
8.6

12. What’s the attraction?
Ability to split income (and cap gains) to obtain lowest effective rate/s
Flow through of CGT concessions esp. small business concessions
Not as readily available through companies
Lack of alternatives

13. Some limits on tax effectiveness of trusts
Trust loss measures
Beneficiary non disclosure tax
Unearned income of minors rate
Tax on trustee for undistributed income
Family trust election for losses and div credit streaming
Complexity/cost/uncertainty
Not to be underestimated

14. Possible solution? Focus on discretionary trusts
Maybe also private unit trusts?
Remove competitive advantage vis a vis companies
Tax Trustee at company rate (or higher?)
Tax beneficiaries at own rate
Give credit to beneficiaries
But lock in who the beneficiaries will be from year to year – remove option to chop and change
May be done by deeming or periodic (not annual) election of beneficiaries to bear the tax
Leave trusts there for those who genuinely need them for reasons other than tax