Navigation: Previous Page | Contents | Next Page
The role of family trusts
Family trusts are considered important for the operation of many family businesses.
Used properly, trusts enable family businesses to use available resources strategically
and optimally. However, the committee heard that the existing legislative
frameworks across the Commonwealth, States and territories pose challenges for
family businesses trading through a trust structure.
This chapter considers the following three challenges to the effective
use of a family trust structure.
- First, some have argued that the rule against perpetuities in
State and Territory legislation undermines business longevity.
- Second, concerns were raised with the effect of taxation
requirements under Division 7A of the Income Tax Assessment Act 1936 (the
1936 Act), Division 6 of the 1936 Act, and the capital gains tax
- Third, some submitters criticised the inclusion of family trusts
in the pool of assets available for distribution as part of a family law
Trading trusts — overview
To understand these challenges, it is important firstly to understand
the role that family trusts play in the family business sector. The following
- an overview of the trust structure, and its capacity to be used
to facilitate business transactions (paragraphs 6.4–6.11);
- a summary of the use of trusts by family businesses (paragraphs 6.12–6.32);
- various aspects of current Australian trust law (6.33–6.122).
The Australian Taxation Office (ATO) defines a trust as 'an obligation
imposed on a person or other entity to hold property for the benefit of
Trusts are typically established by trust deed.
Trusts are administered by trustees, which may be individuals or
Trustees hold legal title in the trust property and associated income. However,
trustees are subject to two strict fiduciary duties. First, trustees must avoid
a situation where their own interest may conflict with their duties as trustee.
Second, trustees must not take an unauthorised profit from the trust.
The trustee may also be a beneficiary, provided they are not the sole
Unless otherwise specified in the trust deed, trustees are personally liable to
third parties including creditors.
Trustees are appointed by, and may be removed by, an 'appointer', which is
'normally the person who has the greatest immediate interest in the affairs of
For beneficiaries, a trust creates an equitable interest in the trust
property and associated income.
Their interest may be discretionary or clearly defined. Discretionary trusts do
not provide beneficiaries definite rights to the income or capital generated by
the trust. Their entitlements depend on the trustee electing to distribute
income or capital.
This contrasts with 'fixed trusts' in which beneficiaries' entitlements to
property and/or income is established, in writing, as part of the trust deed.
Accordingly, fixed trusts do not provide the trustee discretion to determine
the beneficiaries' entitlements.
While nominally entitled to the income generated by the trust property,
beneficiaries may also be 'personally liable to the trustee to the extent of
their interest in the trust'. Accordingly, it has been argued that where trust
assets are insufficient to repay creditors, beneficiaries may be personally
liable to address any shortfall.
Figure 6.1 shows the basic relationship between a trustee and
Figure 6.1: The trust structure
The use of trusts to facilitate
Historically, trusts were used for private arrangements. Their origins
lie in medieval English property and succession law. Trusts, or 'uses', were
primarily used for estate planning purposes to transfer property to heirs and
However, Trusts were also used to 'circumvent the payment of [feudal] dues'.
There was a decline in the use of trusts following the introduction of
legislation in 1535 which sought to disrupt the effect of the trust by
recognising beneficiaries as the property owners for the purposes of levying
duties. This legislation prompted the further development of the trust
The 20th century witnessed a marked expansion in the use of trusts.
Trusts 'expanded from being principally a landholding device to instruments of
Accordingly, as academic commentators have noted:
companies, partnerships and unincorporated non-profit
associations do not represent all the structures available for collective
action towards a common goal. A commercial enterprise requiring contributions
of capital from a number of contributors can be organised as a trust.
Trusts have retained their traditional role in estate and succession
planning, while expanding into other commercial settings. They are, for
example, used as investment vehicles (typically known as 'unit trusts'), for
charitable purposes, and to prioritise payments to certain creditors.
Trusts established for trading purposes, also known as 'trading trusts', hold
property for the purpose of conducting business. Trading trusts typically
consist of a limited liability corporate trustee holding the business on a
discretionary trust for beneficiaries or in a fixed trust for unit holders.
Ultimately, businesses that operate through a trust structure will be subject
to trust law requirements.
The legal implications for businesses operating through a trust
structure differ to those that operate as a corporation. Unlike a company, a
trust is not a legal entity ––this means that the trust cannot sue or be sued.
Trustees therefore may be personally liable for debts incurred in administering
the trust. Beneficiaries, unlike members of a company, have no power to direct
the trustee on the administration of the trust unless this power is specified
in the trust deed. Trustees of a trust, unlike directors of a corporation,
cannot personally guarantee a trust liability.
Family trusts in Australia
Estimates vary as to the number of family businesses that operate
through a trust structure. MGI Australasia found in its 2010 Australian Family
and Private Sector Survey that only 12.2 per cent of family businesses operate
as family trusts. The vast majority, 80 per cent, are structured as private
companies; 5.1 per cent trade as partnerships; and the remaining 1.2 per cent
operate as public companies.
Treasury officials estimated that of the 700,000 discretionary trusts
operating in Australia in 2009–10, approximately 225,000 were family trusts.
However, Treasury also noted the limitations of the data:
How accurate that is is difficult to say because it is a
self-assessing label. It is just something you tick on your tax return. Some
people might misunderstand...
Anecdotally, family trusts appear to be a common feature of family
businesses. Deloitte characterised their use as 'typical':
A typical family business comprises a corporate operating
entity owned by a discretionary trust with both family members and a corporate
entity as beneficiaries. For family groups the equity in the corporate
operating entity is often the primary investment asset. A trust structure is
regularly selected to hold significant long-term investments of family groups
for asset protection and succession planning purposes.
MGI Australasia also identified trusts as a prominent feature
of the family business sector. Its 2010 survey found that 80.0% of family
businesses are structured as private companies and just 12.2% as private trusts,
most of which we could presume are family discretionary trusts. At first glance
this might give rise to the impression that trusts have a relatively minor role
in family business structures.
It is our contention, as experienced family business advisers,
that trusts play a much more significant role in the structuring of family
enterprises. Whilst there is no definitive data to validate this observation, we
can point to substantial anecdotal evidence that supports:
- that a substantial proportion of shareholdings
in family businesses are held by family discretionary trusts and
- that regularly “passive” assets
associated with the family business, such as land and buildings, are held in
Family trusts are typically discretionary trusts.
Family trusts differ from other forms of discretionary trusts in that the pool
of beneficiaries is limited to family members. Under the Income Tax
Assessment Act 1936, a 'family' is defined for the purposes of
discretionary trusts with reference to the 'test individual'. A person may be a
beneficiary of the family trust if he or she is the spouse, parent,
grandparent, brother, sister, niece or nephew, or the lineal descendant, of the
Alternatively, as Deloitte Private explained, dividends may be
distributed to a corporate beneficiary connected with the family—rather than to
individual family members—to fund business activities. This mechanism
reportedly reduces tax liabilities and reduces the funds available to the
business, as the dividends are not subject to higher individual tax rates.
KPMG suggested that company structures are often complemented by a
family trust. Therefore, the data on the number of companies within the family
business sector may also include companies that operate in conjunction with a
subsidiary family trust:
The main operating entity employed by family business is a
private company. For reasons associated with asset protection and maintaining
the family's long-term ownership and control of that capital, many families may
own their equity in a business (the shares in the company) through a
discretionary trust structure.
The Australian Taxation Office (ATO) submitted a similar theory:
On the face of it you might ask why aren't all family
businesses or the lion's share using that family trust as the operating entity.
The data indicated that it is the lion's share of the company that runs the
business. It is fair to say that in some industries, or even in just trying to
raise finance, it is easier to do so with a company as long as that is
supported by a discretionary trust underneath owning the shares, and that makes
a lot of sense to get the advantages of both structures or both entities in
your family business structure.
The chartered accounting firm, Grant Thornton, noted that family trusts
are commonly established with a company acting as trustee:
Companies are often used in conjunction with the family
trust, most commonly to act as a trustee of the trust, due to the limitation of
liability afforded by a company structure; thereby providing a degree of
protection for the business assets which are being held in trust, as well as
the personal assets of the family members, which would potentially be exposed
should those individuals act in the capacity of trustee. In this situation, one
or more family members would normally be shareholders and directors of the
[T]he two legal structures most favoured by family businesses
in Australia are companies and trust estates, however the most prevalent structure
used is the family trust. This is particularly the case for businesses
commenced prior to the late 1970’s, possibly due to the (then) existence of
In recent years this writer has seen more family assets being
owned in a company structure, which for new businesses is now as prevalent if
not more prevalent than family trusts. Despite relative advantages of family
trusts...I expect the trend away from family trusts to continue.
The tax minimisation benefits of
operating a family trust
One of the benefits of operating a trust structure is income streaming, whereby
certain types of income, specifically franked dividends and capital gains, is diverted
to beneficiaries. Income streaming is available to trust beneficiaries but not
to members of a company.
In evidence to the committee, Treasury identified income streaming and the associated
income tax advantages as a principal motive for operating a trust structure:
I guess the key advantages from a family business perspective
of operating a trust relate to the ability to stream income to beneficiaries
and to retain the character of that income in the hands of beneficiaries.
Neither of those advantages is available in a company structure.
Academic commentators have also argued that the decision whether to
operate as a company or through a trust will be guided by the taxation
implications of both structures.
Professor Harold Ford, University of Melbourne, Dr Robert Austin, University of
Sydney, and Professor Ian Ramsay, University of Melbourne, have concluded that
'[w]hether a company or a trust will be employed will depend on the impact of
current taxation legislation in respect of companies and trusts.'
In its submission to this inquiry, the accounting and advisory firm,
Pitcher Partners, emphasised the lure of capital tax concessions in opting to
establish a trust structure:
[T]rusts are often favoured to companies from a tax
perspective, as they are able to access capital gains tax concessions that are
not available to companies. This can be an important consideration when
establishing a family business, as the disposal of the business at a later date
will often result in a capital gain.
Other benefits of operating a
However, several submitters challenged the view that family trusts are
established primarily to minimise taxation obligations. They cited broader
advantages of operating a trust structure; namely to:
- assist the business to manage succession and related estate
- provide a mechanism to retain control of the business within a
- provide asset protection.
Family Business Australia put to the committee that a family trust
structure allows control to be retained within the family and encourages an
equitable business governance model:
The use of trusts, particularly discretionary trusts, plays
an integral part in any family or privately held group structure. In essence,
any family unit is best described as a "socialist" system where all
members are encouraged to be inclusive and treat one another fairly.
Family Business Australia (FBA) also distinguished between tax avoidance
and tax minimisation and emphasised the importance of trusts for protecting
The other thing that annoys them [family businesses] is the
perception that family businesses use trusts because they want to minimise or
avoid tax. They will always want to minimise tax, but they will certainly not
avoid tax. In fact, the trust structures are there to protect the family assets
from business mistakes. I think that there is a lot of misapprehension about
things like trusts, and why family businesses embrace them.
Mr Simon Le Maistre of KPMG also downplayed tax arrangements as a
motivator for using a trust structure:
I often see the tax advantages of family trusts and so forth,
but when I deal with my clients, the amount you are talking about with the tax
advantages around the income streaming and so forth is really lost in the
enormity about what the real issue is here—that is, the more commercial
[I]n the family trusts we see I still recommend to many of my
clients that a vital part of being able to achieve proper estate planning and
proper asset protection is the need to keep the business intact for future
Mr Robert Powell of Grant Thornton, told the committee:
[T]here has been a huge focus on the tax benefits of trusts
and I think that is an overfocus...That is a very minor consideration for
families that decide to use trusts in a family business situation. The other
issues, in my experience, have more relevance and more prevalence as to why
those trusts are set up. Tax is a by-product; it is not the main reason for
MGI Australasia argued: 'it is timely to dispel the regularly dispensed
myths that family trusts are no more than a tax avoidance measure'.
Mr Bill Winter of BW Business Development, similarly, suggested that the
perception of family trusts as a tax avoidance mechanism is outdated:
I had a family trust. When I set up my business with my
brother, we were advised to set up a trust for tax reasons back in the 1970s.
Obviously, that has changed.
Deloitte Private conceptualised family business as a broad structure,
referred to as a 'family group', of which family trusts are an integral part.
Figure 7.2 illustrates Deloitte Private's concept of multiple business ventures
conducted by the same family being treated tax for purposes in the same way as transactions
between subsidiary and parent companies:
Figure 6.2: Family trusts and the family group
Significantly, the ATO told the committee that the advantages to
succession planning, estate planning, asset protection and taxation
arrangements are 'consistent generally with what the ATO observes'. The ATO
further noted that 'the reasons are not just about tax effectiveness'.
The following section discusses a range of legislative matters relating
to the operation of family trusts that have been raised with the committee.
Specifically, the focus is on the following five aspects of Australian law:
- Division 7A of the Income Tax Assessment Act 1936;
- Division 6 of the Income Tax Assessment Act 1936;
- the capital gains tax rules;
- the property settlement rules under the Family Law Act 1975;
- the rule against perpetuities.
Issues relating to Division 7A of the Income Tax Assessment Act 1936
Policy purpose of Division 7A
The direct purpose of Division 7A is to ensure that private companies
cannot make tax free distributions of profits to shareholders and their
associates in the form of payments or loans. The provision ensures that
disguised or informal distributions of company profits are included in the
assessable income of the shareholder or associate in the form of unfranked
deemed dividends (trustees can be shareholders or associates of shareholders of
the private company).
However, underlying this is a broader purpose to protect the progressive
income tax base. This is necessary because the current corporate income tax
rate of 30 per cent is lower than the marginal tax rate for individuals on
incomes above $80 000 (on current thresholds) and lower than the general
trustee tax rate. Without such rules, individuals and trusts would have an
incentive to divert their income into companies to access the lower tax rate
whilst still being able to enjoy the benefit of the income.
ATO administrative practice
Taxation Ruling 2010/3 takes the view that an unpaid present entitlement
is capable of amounting to the provision of financial accommodation (a loan) by
the private company beneficiary in favour of the trust. The Commissioner's view
is that where the funds representing the unpaid present entitlement are not
used for the sole benefit of the private company (eg: other beneficiaries of
the trust can benefit from the use of those funds by the trustee), the private
company has provided the trust with a loan for the purposes of Division 7A. The
alternative interpretation would mean that the provisions of Division 7A could
easily be avoided through the use of an unpaid present entitlement being used
by shareholders to fund private purposes. Accordingly, the view contained in
Taxation Ruling 2010/3 is consistent with the policy intent of Division 7A.
Prior to issuing the ruling, there had been some public statements by
the ATO (but no formal advice or rulings) to the effect that unpaid present
entitlements would not constitute a financial accommodation by the private company
Taxation Ruling 2010/3 was finalised following the publication of a
draft ruling and a consultation process to gain feedback from stakeholders and
raise awareness of the departure from the ATO's previously held view. The
ruling took effect prospectively (from 16 December 2009), to ensure that people
who had relied upon the administrative practice were not disadvantaged.
When Division 7A of the Income Tax Assessment Act 1936 was
introduced in 1998 the ATO took the view that where a trust resolved to
distribute income to a company in the same family group and the distribution
was not physically paid (that is, it was intermingled funds), the ensuing
outstanding unpaid present entitlement was not treated as a loan by the company
to the trust and therefore Division 7A did not apply.
Taxation Ruling 2010/3 stated that Division 7A could apply to unpaid
present entitlements involving family companies and other small business. The
effect of this ruling and the ATO's change in view is that Division 7A is
likely to apply to any trust that distributes income to a company where the
distribution is not physically paid. If Division 7A does apply to an unpaid
present entitlement, then the trust will be deemed to have received an
unfranked dividend equal to the amount of unpaid present entitlement. Tax
lawyer Ms Kay Papadopoulos has noted that the unpaid present entitlement will
be taxed at the corporate rate in the hands of the company.
Some have argued that Division 7A of Part III of the Income Tax
Assessment Act 1936 inappropriately diminishes the resources available to
family businesses that operate through a joint company and family trust structure. The ATO explains
the policy intent of Division 7A as follows:
Division 7A of Part III of the Income Tax Assessment Act
1936 is an integrity measure aimed at preventing private companies from
making tax-free distributions of profits to shareholders (or their associates).
In particular, advances, loans or other payments and credits to shareholders
(or their associates) are, unless they come within specified exclusions,
treated as assessable dividends to the extent that the private company has a
Division 7A is intended to disrupt attempts to minimise the tax paid on
profits earned by a trust, such as a family business trading through a family
trust structure. The ATO explains:
Subdivision EA [is] designed to ensure that a trustee cannot
shelter trust income at the prevailing company tax rate by creating a present
entitlement to an amount of net income in favour of a private company without
paying it, and then distributing the underlying cash to a shareholder (or their
associate) of the company.
The trust is treated as a notional company and the general
Division 7A provisions are modified to determine the amount to be included in
the assessable income of the shareholder (or their associate) as if it were a
In evidence to the committee, the ATO advised that Division 7A responds
to, and is intended to prevent, the following kinds of business practice:
The ATO identified instances where family trusts were making
what we call unpaid present entitlements to bucket companies...What is
generally done with the company is that, if the money were retained in the
trust, it will be taxed at the highest notional tax rate. If it were made an
entitlement to a beneficiary, including a bucket company beneficiary, it will
be taxed at the company rate and therefore it is taxed at 30 per cent. It
appeared as though this bucket company strategy was being utilised to avoid tax
at the higher rate...The ATO, after making this observation, came to the view
that the unpaid present entitlements may actually be treated as loans for
Division 7A purposes.
However, KPMG has claimed that Division 7A goes beyond this intent and
unfairly captures unpaid present entitlements to a company from a trust:
The original intent of Division 7A was to be an integrity
provision that was aimed at ensuring loans that were in substance distributions
of profits from companies to individuals, were caught within these provisions.
Hence, Division 7A required that these loans be repaid or a loan agreement with
minimum repayments be executed. However, unpaid present entitlements to a
company from a trust are not an arrangement to disguise the distribution of
profits to family members...There are very few instances where the trust uses the
unpaid present entitlement for nonbusiness purposes (such as payment of
PricewaterhouseCoopers submitted that Division 7A 'operates to penalise
The FBA contended that the restriction adds unnecessary complications and
Recent changes, particularly the measures around Unpaid
Present Entitlements owing by Trusts to Private Companies after 16 December
2009 are now unnecessarily complicating family and privately owned business models
causing additional compliance and transaction costs at a time when the entire
economy is facing challenges.
In KPMG's assessment, Division 7A can nullify the benefits of operating
a family trust.
It argued that Division 7A:
- inappropriately lessens the resources available to family
businesses. By requiring a loan agreement to be entered into between the trust
and the company, there are additional administrative costs.
The Division also requires loans to be offered at a higher interest rate than
what may be available on the open market.
- limits the capital available to family businesses, as it
restricts a family business from financing related family ventures
- triggers a taxing point within a family group structure. Where a
trust borrows funds from a company to buy a property and a loan is put in
place, the company will be forced to pay a dividend to the family which will be
taxed at the differential between the franking credit and the marginal tax
rate. As KPMG put it: '...you force a taxing point to repay an artificial loan
and that actually pulls capital outside the business'.
- unfairly disadvantages family groups that operate through a trust
structure. KPMG advised that the ATO's definition of an unpaid present
entitlement has led to a situation where financial distributions between
entities in the same family group, for example the transfer of funds from a
corporate beneficiary of a family trust to the business' operating entity, are treated
as Division 7A loans.
Family groups in particular are at a disadvantage because they are forced to
pay a taxing point which other groups are not.
Deloitte Private also commented that 'the application of these rules
within family groups can lead to additional costs, uncertainty and perception
Several options were recommended to address the reported problems with
the operation of Division 7A. PricewaterhouseCoopers recommended that Division
7A be reconfigured to not financially disadvantage intra-family transactions:
We recommend Division 7A be amended so that the rules don't
penalise private business borrowing arrangements where either:
- the borrowing entities are entitled
to claim an income tax deduction for servicing such debt – an 'otherwise
deductible rule'; or
- the terms relating to such loans
are arms' length in nature.
We would also recommend removing the strict requirements that
documentation be prepared with certain timeframes.
Deloitte Private argued that the taxation system should acknowledge and
account for the operation of family groups, through 'essentially ignoring'
A cohesive structure for the taxation of family groups would
ideally allow for profits contributed back into a business to be excluded from
individual tax rate treatment and provide a simple process for calculating
group tax payable. Alternatively the introduction of a family tax unit concept
would provide the ability to pool income (with or without the use of trusts).
In support of this proposal, Deloitte Private submitted that such an
approach would place family groups on equal footing with corporations. It
stated that recognising intra-family transactions would provide the benefits of
family groups benefits that are 'enjoyed by corporate groups who have entered
the consolidation regime'.
Deloitte Private argued that this would be consistent with overseas practice.
The ATO acknowledged that the inclusion of 'bucket company' loans, that
is unpaid present entitlements, within Division 7A 'has been somewhat
On 18 May 2012, the government announced that the Board of Taxation would be reviewing
Division 7A, which includes the treatment of unpaid present entitlements.
In announcing the review, the government noted that Division 7A has been
identified as a 'particularly thorny issue for small business – especially for
users of trusts that need working capital to reinvest in their business'.
The Board is scheduled to report to Government by 30 June 2013.
The committee acknowledges submitters' concerns with the operation of
Division 7A. It recognises the concerns of family business representatives that
Division 7A has imposed significant compliance costs for some family
businesses. However, the committee also acknowledges that Division 7A was
established for the legitimate purpose of ensuring the integrity of Australia's
progressive taxation system. Division 7A should not be altered in a way
that would expose Australia's taxation system to misuse.
ATO regulations should achieve an appropriate balance between supporting
businesses while maintaining the integrity of Australia's taxation system. There
is some evidence that at present Division 7A may not be achieving this balance.
The committee therefore recommends the Board of Taxation take account of the
evidence presented by the family business sector on the effect of Division 7A
on business performance.
The committee recommends that as part of its current inquiry into
Division 7A of the Income Tax Assessment Act 1936, the Board of
Taxation closely review the evidence gathered through this inquiry about the
effect of Division 7A on Australia's family business sector. In considering the
evidence, the Board of Taxation should consider what measures can be taken to
support Australian family businesses, and by extension the Australian economy,
while giving due regard to appropriate taxation obligations.
The committee recommends that the government publicly release the Board
of Taxation's report into the operation of Division 7A of the Income Tax
Assessment Act 1936.
Issues arising out of Division 6 of the Income Tax Assessment Act 1936
The committee heard that the rules in Division 6, Part III of the Income
Tax Assessment Act 1936 (the 1936 Act) that govern the taxation of income
of family trading trusts are complex and cumbersome.
Division 6, Part III of the 1936 Act establishes the rules to determine the
taxation of trust income. This can include the income of family trusts used as
a means of operating a family business.
The final report of the 2009 review Australia's future tax system
provided the following synopsis of the taxation requirements applying to
Trusts can be used as an alternative structure for conducting
business activities. Trusts are largely taxed on a flow-through basis, with the
income of a trust allocated to its beneficiaries based on their 'present
entitlements'. However, losses do not flow through to beneficiaries. Where
there is income of the trust to which no beneficiary is presently entitled, it
is taxed in the hands of the trustee at the top personal income tax rate plus
the Medicare levy.
The general rules governing the taxation of trusts rely on a
mix of trust law concepts (which mostly derive from case law) and tax law
concepts (which derive from case law and statute).
Reflecting on the development of Division 6 and trading trusts in
Australia, academic commentators have noted that trading trusts do not fit
easily within the Division 6 framework:
The assumption on which Div 6 and its antecedents were
drafted was that there would be no significant differences between net or
distributable trust income and what would be calculated as the notional taxable
income of the trustee...Once a business is embarked upon, however, a whole range
of discrepancies emerge.
The 2009 review Australia's future tax system also noted the
difficulties of applying Division 6 to trading trusts. The review found that
there is a lack of certainty about the concepts underpinning Division 6:
Differing views on key concepts, such as 'present
entitlement', 'income of the trust estate' and 'share', create uncertain tax
outcomes for taxpayers, increasing compliance and administration costs.
Accordingly, the review panel recommended that '[t]he current trust
rules should be updated and rewritten to reduce complexity and uncertainty
around their application'.
As the ATO has stated, 'income of the trust estate' and 'share' of
income are key concepts necessary to determine income tax liabilities of
trusts. However, their meaning is not defined in the 1936 Act. These key
taxation concepts were the subject of the 2010 High Court case Commissioner
of Taxation v Bamford & Ors  HCA 10 (the Bamford case).
PricewaterhouseCoopers and the National Farmers' Federation submitted that
rather than providing clarity and certainty for businesses, the Bamford case
has added further complexity to trust taxation laws.
It is evident that the government shares these concerns:
The recent High Court decision in Commissioner of Taxation
v Bamford highlighted ongoing discrepancies between the treatment of trust
income by trust laws, on the one hand, and by the tax system on the other. Tax
outcomes for beneficiaries of trusts often do not match the amounts they are
entitled to under trust law and the trust deed. This can result in unfair
outcomes as well as opportunities for taxpayers to manipulate their tax
Following the release of the final report of the Australia's future
tax system review and the High Court's judgement in the Bamford
case, the Australian government announced it would 'undertake a process of
public consultation as a first step towards updating the trust income tax
provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 and
rewriting them into the Income Tax Assessment Act 1997'.
Where noted, family business representatives shared the view that there
is a need to reform Division 6.
However, submitters were cautious about the outcome of the review. The National
Farmers' Federation argued that, to enable farmers to clearly understand and
work within taxation requirements, further reforms following the Division 6
review should be limited. PricewaterhouseCoopers noted with concern the
potential for the reform process to introduce additional obligations on
The committee is concerned that the current operation of the rules in
Division 6 is unclear, uncertain and may create unnecessary complexity for
Australian businesses. The committee particularly notes the findings of the
2009 review Australia's future tax system which claims that Division 6
increases compliance and administrative costs for Australian businesses. The
committee agrees that there is a need to review Division 6 to ensure it imposes
clear and equitable taxation requirements. The committee looks forward to discussion
as to how the operation of Division 6 could be improved, and encourages the
government to release a timetable for the introduction of legislation.
It is apparent that Division 6 is of particular concern for the family
business sector. While the exact proportion of the family business sector that
operates under a trust structure is currently difficult to quantify, it is
clear that family trusts are an established feature of the Australian business
landscape. Accordingly, the committee recommends that in developing the draft
legislation Treasury meet with representatives of the family business sector.
The reform options should achieve an appropriate balance between promoting
business interests and the proper operation of Australia's taxation system.
The committee recommends that as part of the current analysis of options
to reform the Division 6, Part III of the Income Tax Assessment Act 1936
the Department of the Treasury review the evidence gathered through the
committee's inquiry into family businesses in Australia and consult with
representatives of the family business sector.
Family trusts and capital gains tax
On 1 November 2008, Division 104 of the Income Tax Assessment Act
1997 was amended to repeal the exception to capital gains tax events E1 and
E2. The exception, commonly referred to as the 'trust cloning' exception, was a
key focus of submitters to the inquiry.
Prior to their repeal, subsections 104–55(1) and 104–60(1) of Division
104 of the Income Tax Assessment Act removed the requirement to pay capital
gains tax (CGT) in certain circumstances. CGT is incurred where a trust is
created over a CGT asset by declaration or settlement (referred to by
submitters to this inquiry as CGT event E1).
The trust cloning exception in subsection 104–55(1) removed the requirement to
pay CGT in circumstances where the trust was created by transferring the asset
from another trust with the same beneficiaries and operating terms. Similarly,
CGT is incurred by transferring a CGT asset to an existing trust (referred to
by submitters to this inquiry as CGT event E2).
The trust cloning exception in subsection 104–60(1) provided that capital gains
tax was not incurred if the asset was transferred from another trust with
identical terms and beneficiaries.
Family business advisors submitted that trust cloning was a legitimate,
and necessary, business management practice. MGI Australasia argued that trust
cloning was a 'valuable mechanism' that provided appropriate business
management flexibility and reduced the potential for family conflict to derail
the succession process.
The Institute of Chartered Accountants Australia submitted:
One of the means open to family businesses to transfer
business assets without triggering a CGT event was the practice of trust cloning...Trust
cloning facilitated succession planning, allowing effective control of assets to
pass between trusts, within a family group, without triggering a CGT liability.
On 31 October 2008, the government announced its intention to repeal the
tax cloning exceptions. It was further announced that the repeal would take
effect on 1 November 2008. The trust cloning exceptions were repealed by
the Tax Laws Amendment (2009 Measures No. 6) Act 2010.
The Tax Laws Amendment (2009 Measures No. 6) Act also introduced measures
to allow limited CGT rollover relief for the transfer of assets between fixed
For family businesses, it is notable that the rollover relief was not designed
to be available for the transfer of assets between discretionary trusts. The
Explanatory Memorandum (EM) to the Tax Laws Amendment (2009 Measures No. 6)
Bill 2009 makes clear that this distinction between discretionary and fixed
trusts was intentional and based on the policy perspective that, unlike fixed
trusts, it is difficult to establish the ownership of assets held in
[S]o-called discretionary trusts cannot access the rollover.
This is because it is difficult to establish, with any degree of certainty, the
real underlying ownership of the assets of a discretionary trust. Therefore, it
is equally difficult to test whether that ownership has been maintained.
In effect, beneficiaries' interest should be 'fixed'. This
requirement is consistent with the objective of ensuring that subsequent
changes in effective ownership are subject to appropriate tax consequences.
In announcing the intention to repeal the trust cloning exception, the Government
emphasised that the proposed changes to the CGT rules were necessary to 'help
ensure equity and the integrity of the tax system'.
As stated in the EM, the trust cloning exceptions were considered to undermine
The trust cloning exception allows the creation of a trust
over a CGT asset or the transfer of a CGT asset to an existing trust without triggering
a CGT taxing point, provided the beneficiaries and terms of both trusts are the
However, this can be used to change ownership of an asset
without a CGT taxing point. It potentially allows taxpayers to eliminate tax
liabilities on accrued capital gains, undermining equity and the integrity of
the tax system.
The repeal of the trust cloning exception was intended to promote a fair
marketplace, by ensuring that changes in asset ownership generally trigger a
CGT taxation point:
The repeal of the trust cloning exception is consistent with
the policy principle of taxing capital gains that arise where there is a change
in ownership of an asset.
Submitters to this inquiry acknowledged the market integrity principles
that prompted the repeal of the trust cloning exception.
However, submitters disputed that the use of the trust cloning exception to
facilitate family business transfers, and other 'legitimate' business purposes,
presented a market integrity risk.
The submission of the Institute of Chartered Accountants Australia encapsulated
the views put forward in defence of the trust cloning exception:
The Institute acknowledges that the trust cloning exception
was too wide and needed to be narrowed to protect the CGT base. However, we
believe that the exception should not have been abolished entirely and should
instead have been replaced with narrower provisions, with appropriate integrity
measures, to preserve the use of trust cloning for legitimate business purposes
(including asset and business protection, business restructuring and succession
The view that trust cloning is a legitimate means of operating a
business was submitted as part of the consultation process on the proposed
repeal of the trust cloning exception. For example, at the time of the
consultation process the Institute of Chartered Accountants in Australia
Discretionary trusts are a common conduit structure used by
SMEs. Where SMEs operate through discretionary trust structures, outside of
either section 104-55(5)(b) or section 104-60(5)(b), there is currently little
or no CGT relief for restructuring arrangements.
As demonstrated below, trust cloning is used by SMEs for
legitimate family and commercial reasons. It is often used to facilitate asset
or business protection and restructuring in cases where there is no change in
the economic ownership of the underlying assets.
We are concerned that the proposed removal of the exceptions
to CGT event E1 and E2 will not be replaced by any provision allowing CGT relief
involving the transfer of an asset from one trust to another. From an SME
perspective...we submit that a narrower targeted exception should be considered by
Government and the Treasury.
However, as Treasury's response to the consultation process indicates,
the Government did not support the view that the transfer of assets that occurs
when a trust is cloned is a legitimate business practice that, accordingly,
should not incur CGT:
Most of the submissions on the policy design of the measure
to abolish the CGT trust cloning exception opposed abolishing the exception.
The submissions argued that there are non-tax reasons for using trust cloning,
and uncertainty and integrity concerns should be addressed directly, by
legislating a roll-over.
This request is contrary to the policy intent of...the original
decision to abolish the CGT trust cloning exception. Although there may be
non-tax reasons for the transfer, this does not mean it should not give rise to
a CGT taxing point. It is the change in underlying ownership, not the reasons
for the transaction, that is the policy reason for a CGT taxing point.
The EM to the Tax Laws Amendment (2009 Measures No. 6) Bill 2009
indicates that it was anticipated that the repeal of the trust cloning
exception would have minimal financial impact. The EM also indicates that it
was expected that Australian businesses would not incur significant costs to
comply with the new taxation arrangements.
Evidence presented to this committee about the financial impact of the repeal
of the trust cloning exception was largely anecdotal.
A number of family business owners spoke of the challenges presented by
CGT, and advised that these challenges are preventing the transfer of business
ownership to the next generation. Mr Peter Levi, Managing Director,
Co-owner, Colorific Australia, argued that CGT limits succession options. Mr
Levi advised that while it was possible to transfer the management of the
business, CGT effectively prevented the transfer of business ownership:
Certainly in our own business—we are a 22-year-old business
employing around 35 people and I have both sons in the business—to transition
control is one thing; to transition ownership is another thing altogether. Without
going into details, we have a trust structure, but to transfer part of the
business we are subject to CGT issues. We want to retain control of the
business, obviously, and ownership within the family. Our two boys are coming
up and are effectively managing the business now. One is my
second-in-charge—doing a fantastic job—– and they really deserve to have
ownership, but we cannot afford to be in a CGT situation.
Similarly, Mr Graham Henderson, co-owner of a family business and
Director, Family Business Australia, commented:
We have mentioned quite clearly the capital gains tax
implications and complexities with regard to transfer of a business to the next
generation. Our business is 63 years old, so we will be looking to transition
to the next generation and certainly it is part of our succession planning policy,
so the capital gains tax is a very important plan for us.
Family business advisors also provided anecdotal comment on the effect
of the repeal of the trust cloning exception. KPMG and the Institute of
Chartered Accountants Australia both submitted that the repeal of the trust
cloning exception, and the resulting CGT obligations, have undermined the
sector's capacity to continue the business into the next generation. KPMG
the legislative environment...does not encourage the
implementation of planned succession due to the tax impost that could arise as
a result of changes of ownership of equity or business assets, during the
KPMG further stated:
[f]amily businesses are united when it comes to their desire
for a simpler and more supportive tax regime, particularly with respect to CGT
and inheritance tax. All too often the value created by each generation is
almost wiped out by the substantial tax that is imposed when transferring the
business to the next generation.
The Institute of Chartered Accountants Australia advised that with the
removal of the trust cloning exception the intergenerational transfer of
business ownership triggers a CGT event, which businesses fund within existing
business assets. Accordingly, intergenerational transfers can reduce a
business' asset pool and therefore it's potential productivity and trading
To maintain the viability of the family business sector
consideration needs to be given to ways to enable the legitimate
intergenerational transfer of businesses without tax impost constituting a
significant drain on the sector's resources and potential growth.
KPMG also advised that CGT resulting from succession inappropriately
erodes a business' asset base:
We note that the CGT consequences create an unnecessary cash
flow burden to family groups when looking to transition their business. So much
so, that the tax consequences may outweigh the benefits and the parents may
instead choose to dispose of their interest to third parties, or alternatively
KPMG further advised that the removal of the trust cloning exception
exposes family businesses to poor business practices, such as including the
business among the assets to be distributed as part of a deceased estate. KPMG
noted that such transfers do not attract CGT while, with the repeal of the
trust cloning exception, transfers during the life of the current generation
are liable to CGT. Accordingly, it was argued that 'it is important for
policymakers to look at offering the same concessions in life as we do in
Treasury confirmed that CGT is not payable for assets transferred as part of a
The committee was also advised that the removal of the trust cloning
exception has increased the risk of family conflict and the difficulty of
managing the succession process.
MGI Australasia submitted:
[I]n our experience the results of this has not been to raise
additional CGT revenue, but rather has meant that family members, particularly
siblings, have chosen to share control of family discretionary trusts with all
the potential for conflict that entails and the resultant damage that this
brings to both business and family.
The committee did not receive statistical data to support the view implicit
in this anecdotal evidence that the repeal of the trust cloning exception is
resulting in the closure or downsizing of family businesses.
Family business advisors advocated for amendments to the current CGT
requirements. MGI Australasia called for the trust cloning exception to be
Similarly, but not identically, the Institute of Chartered Accountants
Australia recommended the committee 'give consideration to the merits of
reinstating a narrow version of the previous tax cloning exception'.
KPMG effectively recommended the reintroduction of the trust cloning exception.
However, the recommendation was nuanced as it was founded on the argument that
family businesses should not incur additional costs for adopting smarter business
practices and the concept that a family business is one part of a broader
[I]n order to encourage the longest term sustainability of
family businesses, it is recommended that the CGT treatment the
intergenerational transfers of interests in a business to their family members
should mirror the CGT treatment of an asset passing to a beneficiary through a
Alternatively, the transfer of the family's ownership
interest in a family business to another member of the family should not be
regarded as the change in ownership tantamount to a disposal.
PricewaterhouseCoopers submitted that discretionary trust should be
afforded the same opportunities as fixed trusts, recommending the introduction
of a rollover mechanism to allow family discretionary trusts to disregard any
capital gains resulting from the transfer of individual's assets to the trust.
It was argued that this would not undermine the integrity of Australia's
taxation system as a 'Family Trust election is an integrity measure that penalises
those trusts that provide benefits to non family members'.
The committee appreciates the views of the family business advisors and
family businesses who spoke of the effect of the repeal of the trust cloning
exception. It is evident that among the family businesses that operate under a
trust structure the repeal of the trust cloning exception is an ongoing
concern, and has required changes to business practice. Given the evidence that
CGT implications may be impeding the innovation and planning of family
businesses' succession arrangements, this matter should be considered in the
next five years as more data becomes available. The committee further notes
that similar concerns were raised at the time the legislation to repeal the
trust cloning exception was drafted. The Government's response to these
concerns is compelling. The Government's current view is that there are sound
policy reasons for all transfers of business assets to equally be subject to CGT
CGT and the sale of farms
The committee received some evidence that selling the family farm to the
next generation would not trigger a CGT event, whereas CGT would be payable in
selling a non-rural business to family members. Mr Donald McKenzie, formerly of
KPMG, told the committee:
Whilst these have been mitigated with some stamp duty
concessions—for example, family farm roll-over and small business capital gains
concessions—they still need to be reviewed as there is still stamp duty payable
on property used in family businesses other than farms transferring from one
generation to the next, other than by death.
This issue was put to the ATO for its response. The ATO explained that:
...the tax laws currently do not have any great distinction
between whether you are in business as a farmer or in any other business in the
sense of transferring assets and that sort of thing...
...if you want to sell business assets in certain ways and you
want to, say, then use those proceeds to, say, put into super or to acquire
other assets then there are rollovers that prevent CGT events occurring. I am
not familiar with the concession you are alluding to...
Family law property settlements
Concerns were raised with the inclusion of family trust assets and
income in the pool of property available for distribution as part of a family
law property settlement. Mr Robert Powell, Partner, Grant Thornton Australia,
shared the view that trusts may be established to protect business assets. Mr
Powell advised that historically trusts were created to isolate business assets
from the assets that may be subject to property orders under the Family Law
Act 1975. The committee was informed that sustaining the business through a
family breakdown is an issue of some significance to family businesses:
My experience with the businesses I have worked with is that
a lot of those families, particularly the patriarch and the matriarch, are
terrified that the children will marry badly and their relationships will break
down and that the family's business assets will be under attack from ex‑partners,
ex‑spouses. That is something that keeps them awake at night. That is a
driving reason why a lot of businesses protect the assets within a trust
However, the committee was advised that following recent developments in
family law case law, trust assets, and by extension a family business, may no
longer be immune from the financial consequences of family breakdown:
If a trust is in control of those assets, technically
speaking no one in the family directly owns anything. I will say though that
there have been more and more family law challenges to that concept. I do not
think that proposition holds as much water as it used to. I think there is a
greater tendency for the courts to see through a trust and I would say that a
lot of trusts are formed with the intention of protecting their assets but they
are not necessarily operated in a way that actually provides that protection.
Accordingly, Grant Thornton predicted 'a trend away from family trusts'
as a form of asset protection.
Implicit in this advice is the view that the family law system is
eroding, or has the capacity to undermine, the stability and profitability of
the family business sector. However, there are also policy reasons why it may
be appropriate for business assets to be taken into account in family law
proceedings. Mr Peter Strong, Executive Director, Council of Small
Business Australia, noted that all parties who have contributed to a business,
whether in a formal or informal capacity, should have their contributions
acknowledged in the event of a family breakdown:
I also agree with you on that issue about getting a share of
the results of the business. If someone has been putting in time and effort in
doing the books and a whole range of other things and that is not recognised in
a formal sense, we need to step back and recognise it for reasons of
superannuation. If they do split up, they should get a proper and fair share of
what they put in. It is an issue that we need to look at.
Family law matters are outside the mandate given to the committee under
the Australian Securities and Investments Commission Act 2001.
The committee did not receive any evidence from family law experts such as the
Commonwealth Attorney General's Department or the Family Court of Australia and
the Federal Magistrates Court. Nor did the committee receive evidence from
advocates for family members experiencing family breakdown such as the Women's
Legal Service or the Lone Fathers' Association. Evidence was provided purely from
a business perspective.
The committee understands that it is an established principle of
Australia's family law system that the family courts may have regard to assets
or income held on trust. The High Court of Australia has confirmed that trust
assets and income may be treated as the property of the parties to property
proceedings under the Family Law Act.
Accordingly, beneficiaries' entitlements may be included in property
settlements. Discretionary trusts, such as family trusts operated for business
reasons, may be subject to family law property settlements regardless of the
purpose for which the trust was established or the time at which the trust was
The committee is aware of academic debate about whether business assets
held in a discretionary trust may be inappropriately subject to family law
However, as the High Court has noted, 'the question whether the property of the
trust is, in reality, the property of the parties...is a matter dependent upon
the facts and circumstances of each particular case including the terms of the
relevant trust deed.'
The committee notes that the High Court has held that:
[w]here property is held under such a trust by a party to a
marriage and the property has been acquired by or through the efforts of that
party or his or her spouse, whether before or during the marriage, it does
not...necessarily lose its character as property of parties to the marriage
because the party has declared a trust.
In the absence of compelling evidence to the contrary, it would appear
there are sound reasons for including trust assets in family law property
settlements. It is also evident that the family courts have broad access to
trust assets; and therefore property settlements may affect other forms of
trusts. The ambit of the Family Law Act is broader than discretionary
trusts used as a vehicle for operating a family business. If changes were to
occur to the family law system to appropriately isolate business interests, any
unintended consequences that would prevent a fair and equitable distribution of
property should be avoided. Accordingly, any amendments would need to be
The committee is charged with monitoring the operation of Australia's
It is a principle of this legislation that Commonwealth law and policy should
promote market integrity and stability.
The anecdotal evidence provided to this committee indicates that individual
businesses can be affected by family law property settlements. However, the
evidence has not demonstrated that this is a market stability issue. The
committee acknowledges the concerns of family businesses about the family
courts' access to trust assets. However, the case for legislative amendment has
not been made.
The rule against perpetuities
In addition to concerns with the operation of the Commonwealth law,
family businesses and family business advisors also expressed strong concerns
with the rule against perpetuities, which is operative in States and
Territories. The rule against perpetuities prevents property being indefinitely
held in trust. The committee was informed that the rule is of long-standing.
However, submitters were uncertain of both its origins and the reasons for
which it was established.
The committee understands that the rule has its origins in the 1682
decision of Lord Nottingham in the Duke of Norfolk's Case.
The case established the principle that '[n]o interest is good unless it must
vest if at all not later than twenty–one years after some life in being at the
creation of the interest'.
Effectively, this requires trusts to cease operating no later than 21 years
after the death of a specified person. This requirement reflects the
traditional use of trusts for estate planning purposes. As outlined in the 1993
Northern Territory Law Reform Committee's report into the operation of the rule
[t]he rule of law known as the rule against perpetuities is
one of the rules developed by English courts to restrict dispositions of
property which might tie up land or wealth indefinitely or for too long a time.
The rule developed in the late 17th century, when family settlements were often
made with the intention of keeping property within the landed families from
generation to generation and to protect family fortunes against profligate
heirs and their creditors. These settlements effectively prevented the sale or
mortgage of land over substantial periods of time. The courts thought it
necessary to place some restraint on schemes that tied up land 'in perpetuity'.
Australian courts have also supported the rule against perpetuities,
recognising that it 'performs a useful social function in limiting the power of
members of generations passed from tying up property in such a form as to
prevent its being freely disposed of in the present or the future'.
The application of the rule against perpetuities differs across the
states and territories. One jurisdiction, South Australia, has repealed the
The rule was abolished in 1996
following a 1983 review by the Law Reform Committee of South Australia, which
held that the rule had led to 'stupidities' and 'unbelievable results' and was
ill-suited to the modern business and taxation environment.
Accordingly, South Australia adopted a legislative scheme that permits
beneficiaries of trusts operative for 80 or more years to apply for court orders
that the trusts be disbanded.
It follows that a trust may continue operating should the beneficiaries agree
to its continuance.
A similar approach has been adopted by other common-law jurisdictions.
In December 2010, the Law Reform Commission of Nova Scotia released its report The
rule against perpetuities. The report notes that in addition to South
Australia, legislation to abolish the rule has been adopted in Saskatchewan,
Ireland and several US states and Caribbean nations.
However, the report also notes that '[a]bolition has not proven universally
The rule continues to operate in all Australian states and territories
other than South Australia.
In general, the States and Territories have modified the operation of the rule
with effect that a trust can be in existence for no more than 80 years. In the
Northern Territory, a trust instrument may specify either 80 years from the
date on which the trust was established or the traditional period of a 'life in
being plus 21 years'.
Reviews conducted by the Northern Territory Law Reform Committee and the
Queensland Law Reform Commission provide insight into the reasons for the rule's
continued existence. Reporting in May 1971, the Queensland Law Reform
Commission held that the rule 'remains a necessary aspect of a soundly based
system of property law'.
Similarly, reporting in 1993, the Northern Territory Law Reform Committee
concluded that it is fair and equitable for the law to 'limit the remoteness of
There is consensus among Australian jurisdictions that it is
inappropriate to apply the rule to superannuation trust funds and charitable
funds. In jurisdictions where the rule applies, legislation expressly excludes
superannuation trust funds and trusts established for charitable purposes.
The exclusion is also supported by Commonwealth legislation, which expressly
provides that the rule against perpetuities does not apply to trusts operated
by superannuation entities.
Similarly, in South Australia, a court may not order the disposition of
property held in superannuation trust funds or charitable trusts.
Some international reviews have noted with concern the perpetuity rule's
implications for commercial transactions. Recommending that the rule be
abolished, in 1982 the Manitoba Law Reform Commission stated: '[t]hat
commercial interests should be subject to any perpetuity rule is misconceived'.
Similarly, reporting in 2000, the Law Reform Commission of Ireland concluded
that the rule should be abolished.
In reaching this conclusion, the Commission was concerned with the effect of
rule on commercial transactions.
Concern is also shared by jurisdictions that have elected to retain the
rule against perpetuities. Reporting in 1998, the Law Commission (England)
recommended precise legislative drafting to enable commercial transactions to
be excluded from the operation of the rule against perpetuities. The
Commission's recommendation was based on the view that 'as a matter of general
principle transactions of a commercial character should be excluded'.
Australian jurisdictions share the concern that the rule against
perpetuities may adversely affect commercial transactions. Commenting in 1976, the
New South Wales Law Reform Commission held that the rule should not affect
It could be argued...that the rule has its origin in family
settlements and to derive from it a general concept applicable to commercial
transactions is wrong...We agree. In our view, the rule against perpetuities
serves little purpose when applied to arrangements which are essentially of a
Nearly two decades on, the same reasoning is evident in the 1993 report
of the Northern Territory Law Reform Committee. Citing the 1976 New South Wales
Law Reform Commission's report, the Northern Territory Law Reform Committee
likewise concluded that 'the rule against perpetuities serves little purpose
when applied to arrangements which are essentially of a commercial nature'.
However, despite the view that the rule against perpetuities is
unnecessary, and indeed problematic, in a commercial context, neither the
Australian nor the international reviews expressly considered trading trusts.
The New South Wales Law Reform Commission and the Northern Territory Law Reform
Committee recommended express legislative exclusions for options to acquire an
interest in property, such as an option to renew a lease.
The reports do not analyse the effect of the rule on trading trusts.
Internationally, the Law Reform Commission of Ireland focused on 'future
easements, options to purchase land with third parties involved, options to
purchase shares, [and] nominations and powers of advancement under pension
The Commission did not consider the rule's effect on businesses that operate
through a trust structure. The Law Commission (England) did refer to family
trusts and arrangements between family members. However, the analysis is
focused on contracts between members of the same family and does not expressly
consider family trusts used as a means of conducting a business.
Reflecting the concerns of the 1983 South Australian inquiry into the
rule against perpetuities, submitters argued that the requirement that trading
trusts should cease to operate after a specified period is unsuitable in the
modern business context. Submitters noted that the 80 year limit may not
reflect the longevity of family businesses. Mr William Noye, National Leader,
Family Business Services, KPMG, noted that 'there are certainly examples in
Europe where families have gone on for 200 or 300 years owning particular
Mr Donald McKenzie, a former partner of KPMG, also highlighted that the
termination of the trust may not coincide with the planned termination of the
It seems a bit illogical...The issue is that, should that
disadvantage somebody who is just going to continue on the business on the day
after it vests–the same way they were running the business the day before it
Further, it was submitted that, rather than facilitating a robust private
sector, the forced vesting of trading trusts will arbitrarily limit business growth.
In support of this argument, three significant business costs were identified.
First, PricewaterhouseCoopers submitted that the rule against perpetuities restricts
prudent business and asset management:
The 80 year limit on trusts can also impact business
decisions and structures before the trust is terminated. If a family is to
acquire a major asset and their trust is already 50 years old, it would be
unwise of them to place that asset in the existing trust–a vehicle with just 30
years remaining. This will prompt the creation of a new structure to hold the
asset, further complicating the family's financial structure and increasing the
cost of managing their assets.
As Mr Paul Brassil, a partner at PricewaterhouseCoopers, informed the
committee: '[o]ne would not even today sensibly put newly acquired assets into
a family trust that has only 30 or fewer years left in it'.
Second, the committee was advised that the rule against perpetuities
will place a significant taxation burden on family businesses. Capital gains
tax implications were commonly cited; the present generation will be required
to finance the accumulated CGT of multiple generations. Mr Noye submitted that
'it is almost like a ticking time bomb from a family business perspective...there
will be, if you like, a triggered CGT event'.
PricewaterhouseCoopers provided the following explanation of the CGT
The termination of a trust can have a serious impact on
families and family businesses. When a trust is dissolved, assets must be
transferred to a different owner. If the value of the asset is greater than the
cost, it precipitates a Capital Gains Tax (CGT) event for the beneficiaries,
who may be forced to find up to 46.5 per cent of the assets' value without a
liquidity event. This forced tax point can threaten the viability of the family
Mr Brassil alerted the committee to additional tax implications:
[T]he states are treating the transfer of those assets out of
the trust as being a matter that involves ad valorem stamp duty. So 5½ per
cent, or more, of the market value of the asset potentially gets hit for stamp
Third, it was also evident that family businesses will incur additional
costs to restructure the business. When asked to comment on the significance of
the family trading trust for the Australian economy, Treasury officials
commented that any change in business structure entails significant cost:
If you have a business that has worked in a particular model
or framework for a period of time there are costs potentially with respect to
any sort of change to structures. There are potential costs to taxpayers and
businesses from those changes. The observation of why would particular structures
be important to the broader economy are [that they are] the structures that
businesses are currently operating under.
As alluded to in Treasury's comments, it was argued that the rule
against perpetuities will adversely affect the broader Australian economy. As
PricewaterhouseCoopers submitted, '[t]rusts have become such a part of the
Australian business fabric that even government I think is quite happy that
they are here to stay.'
Family business advisors and representatives argued that the effect of the rule
against perpetuities on family trading trusts is an 'issue we are increasingly
starting to face'.
Estimates varied about when the 80 year timeframe for family trusts will expire.
As Mr Noye acknowledged, the vesting date will differ for each family trust.
However, in general it was estimated that the effect of the rule against
perpetuities will become acute in the next 10 to 20 or 20 to 30 years.
For example, Mr Donald McKenzie predicted that by 2030, 50 per cent
of family trusts will vest.
Accordingly, family business representatives and advisers strongly advocated
for the government to address the concerns raised with the rule against
Mr McKenzie called for governments to be proactive in addressing the effect of
the rule for trading trusts:
2030 might be a little bit of a stretch – it might be 2040 –
but it is coming and all I am sitting here and saying is 'Let's get ahead of
the game; let's have a good look at this now; let's sort it out so that we do
not sit there'.
It was further argued that the rule against perpetuities should be
repealed. Mr Brassil told the committee that 'it is high time to challenge
the 80 year rule'.
Mr Le Maistre concurred:
I cannot see any practical reason why that needs to continue
to be in place. From a policy perspective, if you are looking to continue to
grow and expand these businesses and have the generational transfer going
forward is, I think that is something else which we really should be actively
The effect of the rule against perpetuities was also noted by academic
advisers, who held that, as a general principle, rules that are not relevant in
the modern context should not be retained. As Professor Mary Barrett, Professor
of Management at the University of Wollongong, argued:
I am inclined to think, if nobody can remember why it was
there and if it is holding people back, it is probably a 'cat at the temple
door' kind of situation—it was part of the ritual once but nobody can remember
why. Maybe it happened by accident and it does not seem to help any longer.
Similarly, Dr Chris Graves of the University of Adelaide Business
School, told the committee:
[I]f there is a consensus that there are still some
advantages of structuring a family in business through using trust structures
as opposed to company structures, then it would appear that this arbitrary
limitation of 80 years—if you have an artificial time period which is imposing
costs which otherwise could be avoided—is obviously something that is serious
to look at.
In support of abolishing the rule against perpetuities, it was submitted
that permitting family trading trusts to continue in perpetuity is in line with
the opportunities available to family companies.
When companies exist in perpetuity – and we are all comfortable
with that – why would a trust need to end? Whatever historical reasons there
were for them to have a life, I challenge them in the current climate and I see
Australia's legal system should support a robust economy and commercial
certainty. While largely anecdotal, there is evidence that the rule against
perpetuities has the counter effect. The committee notes with interest comments
by the Manitoba Law Reform Commission that the rule against perpetuities is
'yesterday's device for solving yesterday's problems...its day, certainly in
this province, is done'.
The committee has received evidence supporting this view. The marketplace has
evolved while the rule against perpetuities has substantially remained since it
was first articulated. The rule against perpetuities is an example of
Australia's legal system not keeping pace with developments in the business
The effect and broad scope of the rule against perpetuities warrants
further investigation. Given that the rule is likely to require family trading
trusts to vest in the coming decades, it is necessary that prompt attention is
given to the concerns raised by submitters to this inquiry. It is essential
that State and Territory governments consider whether the rule continues to be
appropriate for Australia's modern economy. Accordingly, the committee
recommends that the Council of Australian Governments, or its relevant
Ministerial Council, inquire into whether the rule can be abolished in each
jurisdiction, or whether its scope can be limited to appropriately exclude all
The committee recommends that the Council of Australian Governments, or
its relevant Ministerial Council, inquire into whether the rule against
perpetuities can be abolished in each jurisdiction, or whether its scope can be
limited to appropriately exclude commercial arrangements. In undertaking this
review, the Council should consider how many trading trusts are likely to be
affected in the next two decades. It should also consider the effect that abolishing
the rule against perpetuities in South Australia has had on trading trusts
operating in the State.
If the Council determines that it is not appropriate to abolish or amend
the rule, the committee recommends that it should actively engage with the
business sector to alert trading trusts to the financial implications of the
Navigation: Previous Page | Contents | Next Page