Artful Aussie Tax Dodger: 100 Years of Tax Reform in Australia

ibidem Press, Stuttgart

Table of Contents

Acknowledgments

Abbreviations

The Cover Cartoon

Preface

Chapter One—Overview

1.1 Overview

1.2 Structure

1.3 Section Outlines

Chapter Two—Introduction

2.1 Overview

Chapter Three—The Purpose and History of Trusts

3.1 Introduction

3.2 The Purpose and History of Trusts

Chapter Four—Equity and Fiduciary Relationships

4.1 Introduction

4.2 Equity

4.3 Fiduciary Duty

Chapter Five—Types of Trusts and Their Methods of Creation

5.1 Introduction

5.2 Express or Declared Trusts

5.3 Presumed or Implied Trusts

5.4 Constructive Trusts

5.5 Unit Trusts

5.6 Discretionary Trusts

5.7 Bare Trusts

5.8 Trading Trusts

5.9 Blind Trusts

5.10 Service Trusts

5.11 Charitable Trusts

Chapter Six—Termination of Trusts

6.1 Introduction

6.2 Termination of Trusts

Chapter Seven—Trust Records and Trust Accounting

7.1 Introduction

7.2 Implied Trusts

7.3 Constructive Trusts

7.4 Trust Accounting

Chapter Eight—Taxation of Trust Distribution under Australian Income Taxation Law

8.1 Introduction

8.2 Taxation of Trust Income and Property

8.3 CGT Implications

8.4 Non-Resident Trusts

8.5 Stamp Duty and Land Tax Issues

8.6 Personal Exertion Trusts and Interposed Entities

Chapter Nine—Future Legislation and Suggested Outcomes

9.1 Introduction

9.2 Likely Trust Taxing Legislation

9.3 Political Influences

9.4 Historical Examples

9.5 Conclusion

Chapter Ten—Introduction

10.1 Overview

Chapter Eleven—The Australian GST System

11.1 How GST Functions

11.2 The Australian GST System

Chapter Twelve—The Reason the Howard Government Pursued the Policy Option of a GST for Australia

12.1 Introduction

12.2 Demand for the GST

12.3 Conclusion

Chapter Thirteen—The International Implications of the GST

13.1 Introduction

13.2 Australian GST—International Implications

13.3 Conclusion

Chapter Fourteen—An International Comparative: The Cook Islands

14.1 Introduction

14.2 Cook Islands’ Political, Social, and Economic Overview

14.3 Cook Islands’ Government Finances

14.4 The Australian GST Compared to the Cook Islands VAT

14.5 Likely Outcomes of Australia’s GST

Chapter Fifteen—A Better Plan: Alternatives and Solutions to the Problems of the Australian GST System

15.1 Introduction

15.2 Alternatives

15.3 Conclusion

Chapter Sixteen—Introduction

16.1 Overview

16.2 Australian Domestic Tax Avoidance Countermeasures (GAARS)

Chapter Seventeen—The Legislative Background to Tax Reducing Structures

17.1 Introduction

17.2 Taxation Relief Incentives—Acceptable Tax Avoidance

Chapter Eighteen—Tax Planning Structures and Tax Reducing Methods

18.1 Introduction

18.2 Public Opinion

18.3 Acceptable Tax Avoidance—Tax Planning

Chapter Nineteen—Tax Avoidance Schemes

19.1 Introduction

19.2 Australian MMTAS

Chapter Twenty—Promotion of Tax Avoidance Schemes

20.1 Introduction

20.2 MMTAS of the 1990s

20.3 Conclusion

Chapter Twenty-One—Anti-Avoidance Provisions—Part IVA and Personal Services Income Provisions

21.1 Introduction

21.2 Part IVA

21.3 Personal Services Income

21.4 Interposed Entities

Chapter Twenty-Two—Offshore Trading and Tax Havens

22.1 Introduction

22.2 Tax Havens of the South Pacific

22.3 Offshore Trading Trusts

22.4 Combating Trans-Jurisdictional Tax Acoidance

Chapter Twenty-Three—Suggested Australian Reforms

23.1 Introduction

23.2 Suggested Tax Reforms

Chapter Twenty-Four—Possible Motivations for Tax Reform

24.1 Introduction

24.2 Possible Motivations for Tax Reform

Chapter Twenty-Five—A Concise History of Tax Reform in Australia

25.1 Introduction

25.2 1975—The Asprey Report Defining a ‘Good Tax System’

25.3 1993—Tax Law Improvement Project: Capital Gains Tax

25.4 1999—The Review of Business Taxation (The ‘Ralph Report’)

25.5 2000—A New Tax System: Goods and Services Tax

25.6 Splendor/Squalor Ratio

25.7 2010—Australia’s Future Tax System Review (The Henry Review)

Objectives and scope:

Composition and consultation:

Structure and timing:

Chapter Twenty-Six—Part IV Conclusion: Are There Alternatives?

26.1 Summary

Chapter Twenty-Seven—The Bottom Line

27.1 Introduction

27.2 Review

27.3 Contribution to the Study of Tax Compliance Behavior

27.4 Research Limitations

27.5 Suggestions for Further Research

27.6 Conclusion

Appendix A

Tieleman: A Case Study of a Tax Practitioner 2001

Appendix B

ATO’s List of ‘Eligible’ Mass-marketed Tax Avoidance Schemes (2002)

Appendix C

Australian Governments since Federation

Bibliography

Articles/Books/Reports

Case Law

Legislation

Treaties

Other Sources

Acknowledgments

This book is the product of research conducted toward my master’s studies at Curtin University, Perth, Western Australia. Professor Dale Pinto, my mentor, suggested substituting research papers for formal course work for my master’s degree research. In the mid-1990s, external studies were not available for higher degrees at Curtin Business School, so a ‘work-around’ was required. This book is a result of that work.

Ultimately, the research on tax avoidance schemes became the seed of my PhD thesis, published in 2015 as Heat, Dust and Taxes. Without Dale’s suggestion, none of this would have happened.

Of course, it takes a village to raise a child, and there are many others who have influenced these writings. I extend many thanks to all of those people who have helped me along the way.

Special thanks go to the people of the Cook Islands, who were very helpful and open to my research there; to my wife Julie, who fulfilled the roles of research assistant and organizer; and to John Craig, who acted as my editor.

I am thankful to Jakob Horstmann and Valerie Lange, my primary contacts at ibidem-Verlag, for their patience and cooperation in crossing not only the physical distance from the United Kingdom, Germany, and Outback Australia, but also across the nuances of British and American English, and their mother tongue—German. I extend my gratitude to all of the people at ibidem-Verlag who must find this crazy colonial an extremely curious beast indeed.

Abbreviations

ABC              Australian Broadcasting Commission

ABN              Australian Business Number

ABS              Australian Bureau of Statistics

ACOSS              Australian Council of Social Services

ACT              Australian Capital Territory

ALP              Australian Labor Party

ASIC              Australian Securities and Investments Commission

Atax              Australian School of Taxation

ATO              Australian Taxation Office

ATTA              Australasian Tax Teachers’ Association

BAD              Bank Account Deposits Tax

BISEPS              Business Industry Sociology Economy Psychology               Systems

BPS              Budplan Company Syndicate

COAG              Council of Australian Governments

CRA              Conzinc Riotinto of Australia Limited

CSIRO              Commonwealth Scientific and Industrial               Research               Organisation

CTSI              Centre for Tax System Integrity

DCS              Deputy Crown Solicitor

ELS              Electronic Lodgement System

FBT              Fringe Benefits Tax

FCA              Federal Court of Australia (Single Judge)

FCAFC              Federal Court of Australia Full Court (3 or more               Judges)

FID              Financial Institutions’ Duty

FSDU              Federated Ship Painters and Dockers Union

GAARs              General Anti-avoidance Rules

GST               Goods and Services Tax; see also VAT

HCA              High Court of Australia

HWIs              High Wealth Individuals

IGA              Intergovernmental Agreement on the Reform of              Commonwealth—State Financial Relations 1999

IRS              Internal Revenue Service (USA)

ITAA 1915              Income Tax Assessment Act 1915 (Cth)

ITAA 1936              Income Tax Assessment Act 1936 (Cth)

ITAA 1997              Income Tax Assessment Act 1997 (Cth)

LP              Liberal Party of Australia

MMTAS              Mass-marketed Tax Avoidance Scheme

OECD              Organisation for Economic Co-operation and               Development

PAYE              Pay-as-You-Earn (later part of PAYG below)

PAYG              Pay-as-You-Go

QC              Queen’s Counsel

RST              Retail Sales Tax

SPP              Specific Purpose Payment

TAFE              Colleges of Technical and Further Education

TLIP              Tax Law Improvement Project

VAT              Value Added Tax; see also GST

WA              Western Australia

WST              Wholesale Sales Tax

The Cover Cartoon

The cartoon on the cover is more than it appears to be. There are numerous hidden messages as a commentary to Australian tax legislation in its first century of operation.

The caricature on the left is an effigy of my uncle Merton Fitzpatrick. Merton was a pioneer of the pastoral industry in Western Australia from the 1880s to the 1930s. He lived at a time when not only did the Commonwealth of Australia come into existence, but he became a taxpayer under the ‘new taxing regime’ of the Income Tax Assessment Act 1915 (Cth) (ITAA 1915).

He began to face the problems of ‘minimizing his taxation burden’ that would continue to concern taxpayers 100 years later. He is carrying the loads of documents not previously encountered by taxpayers of his class since colonization.

Time passes through the journey to the future, past the tax avoidance schemes of the second half of the twentieth century, illustrated by the mass-marketed tax avoidance schemes (MMTAS) of the 1990s, being advertised by ‘dodgy promoters’ as we entered the twenty-first century.

The introduction of the Australian goods and services tax (GST), in July 2000, is another milestone of Australian taxation.

The young woman of the twenty-first century, depicted on the walkway of a modern Australian city and focused on her cell phone, carries the same load of tax compliance, though probably an electronic version in 2015. She shares the same attitude toward the payment of taxation imposts of the young pastoralist 100 years earlier.

As she heads toward the future, she cannot see around the corner of what lies ahead, but clearly signposted is an indication that she will take with her the habits of the past. Tax administrators, depicted as the official from the Australian Taxation Office, are lurking around the corner trying to catch ‘the Artful Aussie Tax Dodger’.

Preface

On March 30, 2016, the Australian prime minister proposed a reform to Australia’s income tax legislation. The proposal, to return powers to tax income to the states, would have effectively returned Australia’s taxation system to its legislative position in 1936. However, it is acknowledged that the exclusive power to tax income did not become the province of the Commonwealth until 1942. This exclusive power has remained in the hands of the Commonwealth ever since.

At Federation on January 1, 1901, the Commonwealth of Australia was empowered to levy taxes on incomes. Despite that, the states levied their own income taxes until September 3, 1915 when the Commonwealth introduced its first income tax assessment act.

For 100 years Australia has ‘reviewed’ and ‘reformed’ its income tax legislation. It has come to a point where the, sixty-four sectioned, Income Tax Assessment Act of 1915 (ITAA 1915) has evolved into two acts comprising nearly 1,000 sections.

Just one year into a new century of taxation, the Australian federal government proposed to go forward to the past, some seventy years earlier when the Income Tax Assessment Act of 1936 (ITAA 1936) transferred all powers to tax income from the Australian states to the exclusive realm of the Commonwealth. The prime minister proposed to end the exclusive power of the federal government to empower the states to impose tax on incomes. This was something vigorously opposed by successive federal governments since the introduction of the ITAA 1936.

At the heart of the proposal was the states’ prolonged argument that they were not ‘getting their fair share’ of taxes raised by the Commonwealth. The Australian federal government has consistently countered those arguments by suggesting tax revenues are a limited resource and the states are ineffective in controlling their expenditures.

A key factor often alluded to by taxing authorities is a shortfall in anticipated tax revenues as to actual revenues received. They point to ‘revenue leakages’ caused by taxpayers’ resistance to pay tax, and the evasion or avoidance measures, engaged in by taxpayers, to eliminate or reduce tax paid by them.

Research has indicated that an overarching factor that contributes to tax revenue leakages is the general attitude toward compliance with the law and the payment of tax. It is suggested that in Australia, which was established as a British penal settlement in New South Wales in 1788, the attitude toward noncompliance with laws and resistance to authority has become embedded in the population’s psyche.

This book looks at how Australia’s tax legislation was grounded, added to, avoided, and evolved, until it went ‘Back to the Future’. To do this, it first considers Australia’s ‘received law’ that the British colonists brought with them from Great Britain when they established the settlement in Port Jackson on January 26, 1788. In particular it examines the British Common Law entity: the trust.

Trusts have been used for centuries by British trading enterprises and large estates not only to preserve the estates but also as entities to avoid or mitigate tax burdens of the interested parties/beneficiaries/taxpayers. In the twenty-first century, trusts remained relevant corporate structures for tax planning purposes.

‘Offshore’ trading trusts were specifically operated whereby tax could be minimized or avoided entirely through the transfer of income to low or non-taxing jurisdictions, namely ‘tax havens’. This activity, once popular with corporate taxpayers, has become frowned upon, at least socially, and governments have been active in countering the use and availability of such jurisdictions.

A common thread throughout this book is the comparison of Australia’s taxation law with that of the South Pacific State of the Cook Islands. Once a much publicized ‘tax haven’, chiefly through the corporate structure of the ‘Offshore Trading Trust’, the Cook Islands and Australia terminated that avenue of tax avoidance through bilateral information and tax sharing agreements in 2009.

After examining the principles of Trust Law in Part I, in Part II the book then considers Australia’s consumption tax introduced in 2000. The Australian GST is compared to the Cook Islands’ Value Added Tax (VAT) legislation, introduced three years earlier, in 1997. The comparison is provided to assess the likely social and economic impacts of Australia’s GST from the perspective of its introduction in 2000.

The book finds that apart from a suggestion to increase the tax rate and to broaden its tax base in 2016, little changes were made to the operation of Australia’s GST in its sixteen years of operation. The actual social and economic influences of the GST on taxpayer compliance, evidenced in 2016, are compared to the anticipated impacts on businesses and taxpayer behavior predicted in 2000.

It is suggested that ultimately little changed in overall revenues but compliance requirements caused a shift in how small business operates, as wells as a general move toward unreported cash transactions by taxpayers. The key impact of the GST was that taxing powers and revenue controlled moved from the states to the Australian federal government.

The Cook Islands is again referred to in Part III as one of Australia’s landmark tax avoidance scheme cases—Spotless Services Ltd v. Federal Commissioner of Taxation (Spotless case).[1] The Spotless case centered on the use of an offshore trust located in the Cook Islands to avoid the imposition of Australian income tax on interest cash deposits.

Finally, Part IV considers the bilateral treaties between Australia and the Cook Islands on information and tax sharing agreements in 2009, which effectively ended the status of the Cook Islands as a tax haven and closed that avenue of tax avoidance activity to Australian taxpayers as part of Australia’s taxation reforms.

Chapter One—Overview

What we are proposing to the states is that we should work together on this basis: that we, the federal government, will reduce our income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount that we have withdrawn from. So, there would be no increase in income tax from a taxpayer's point of view. He or she would pay the same amount of income tax.

(Malcolm Bligh Turnbull on his proposal that the states should reintroduce income tax legislation March 2016; Prime Minister of Australia, 2015–; 1954–)

1.1               Overview

The purpose of this book is to follow the history of 100 years of taxation legislation in Australia. Its principal focus is on taxpayer compliance behavior in Australia, and reveals that an attitude of noncompliance is part of the psyche of Australians.

However, in 2016, Rozvany suggests, [w]hat is perceived as ethical by one generation or indeed a different society in the same generation may not be perceived as ethical to the next.[2] He points to slavery, adult suffrage, and gender equality as examples of changing social values. He suggests that society now demands ethical behavior toward tax compliance by corporations and high wealth individuals, and that the risk-taking tax avoiding behavior of the 1960s through the 1990s is no longer acceptable.

A reflection of those earlier attitudes of tax compliance behavior may be found in Clyne’s 1969 comment:

Paying taxes is rather like alcohol, tobacco, heroin or wild women. It is simply a habit … costly, addictive, soul-destroying and unnecessary. But in one way it does differ from alcohol, tobacco, heroin and wild women—It offers no compensating element of pleasure, satisfaction or tranquillity. So one ought to kick the habit of paying taxes and develop the anti-habit of tax avoidance.[3]

Rozvany may well be correct in his assertion that the economic behavior of ‘corporate citizens’, which was once tolerated, or even accepted by society, is no longer considered ethical. Previously, Fullarton has also suggested that changes in social attitudes apply to a great number of economic, social, and environmental influences on social behavior.[4] However, he further suggests that tax avoidance activity is not linear but rather it is cyclical,[5] and as far as society’s attitude toward the payment of tax is concerned, old habits die hard.

As governments and multinational companies struggle with tax avoidance and anti-avoidance legislation and schemes, the following question remains: Has society and commerce really changed its attitude to paying tax, and if so do Australians regard tax avoiders as heroes or villains?

This book suggests that, unlike human rights and equality for all people, an aversion to paying tax is deeply embedded in taxpayers’ compliance behavior. It suggests that while legislators and administrators move to counter aggressive tax avoidance activity, tax dodging remains an accepted business practice and an art form in Australia.

To support that, this book examines Australian tax law by considering four basic aspects:

·      An examination of the establishment and functions of the earliest English incorporated trading entity—the British Trust, which was brought to Australia as received law in 1788;[6]

·      An examination of Australia’s consumption-based tax introduced in 2000—Goods and Services Tax (GST);

·      An analysis of tax avoidance schemes in Australia by examining the mass-marketed tax avoidance schemes (MMTAS) of the 1990s; and

·      Measures taken by Australian governments and tax administrators to counter tax avoidance activity from the review of taxation in 1975 (Asprey Report)[7] to the bilateral tax information sharing agreements with the Cook Islands in 2009.[8]

The four aspects of Australian tax law are chosen as they share a common thread. The trust, brought to Australian soil by the British settlers on January 26, 1788, became a key entity by which trading organizations were and are structured with the principle objective of reducing the tax liability of estates and businesses. The trust was used extensively to avoid tax over 100 years not only by resident taxpayers but also through the use of ‘offshore trading trusts’ established solely for that purpose, by resident taxpayers, in ‘tax havens’ such as the Cook Islands in the late twentieth century.

One of the reasons put forward by the Australian government in 2000 for the introduction of Australia’s GST was that some Australians were not paying their fair share. It was suggested that ordinary Australians [were] facing the prospect of paying the highest possible income tax rate and that the GST would create a fair, simple and efficient system.[9]

The Cook Islands introduced its VAT legislation in 1997. As the Cook Islands was also a principal tax haven for Australian companies, as demonstrated by the Spotless case, it was considered a reasonable comparative as to what might be expected by the introduction of the, significantly more complex, Australian GST legislation in 2000.

The history of the development of Australia’s tax avoidance schemes is analyzed through the use of tax avoidance schemes that became mass-produced and marketed to ‘ordinary’ Australian taxpayers in the 1990s. The high level of acceptance of these schemes and participation in them by general wages and salaried taxpayers was unprecedented.

The history of the MMTAS of the 1990s strongly supports the philosophy of this book—that an attitude of noncompliance is part of the psyche of Australians.

Finally, the book considers antitax avoidance measures taken by Australian governments over the century of tax reform 1915–2015 to create a fair, simple and efficient system … that rewards hardworking families, promotes business and jobs and builds a better Australia.[10]

This book considers Australian tax law to have been established at Federation in 1901 when the separate Australian states, successors of the British colonies established during the period 1788 (New South Wales) to 1834 (South Australia), formed the Commonwealth of Australia.[11] Along with many other powers and duties the Commonwealth of Australia Constitution Act 1900 (Australian Constitution) empowered the Australian federal government to make laws with respect to taxation.[12]

The, sixty-four sectioned, Income Tax Assessment Act 1915 (Cth) (ITAA 1915) became part of Australia tax law on September 13, 1915. Therefore, 2015 was the centenary of the introduction of the first federal income tax act.

In 2016, Australian taxation law and compliance with its requirements have reached levels of confusion and complexity never imagined by the founding fathers of the Federation of the Commonwealth of Australia in 1901.

Of significance to this book is that while the Australian federal government was empowered to make laws with respect to taxation, many state taxes remained in place. Therefore, rather than distinct transfer of the powers of taxation from the states to the Commonwealth on the commencement of the Australian Constitution at Federation on January 1, 1901, the transfer process was transitional over the entire twentieth century. Part IV examines the history of Commonwealth taxation and contains a table of significant events and dates.

The book focuses on a series of papers written as part of the author’s postgraduate studies in the early 2000s. They point to topics of tax law that remain unresolved in 2016, such as the Turnbull Liberal Government’s proposal to increase goods and service tax to 15 percent, and a suggestion that the Australian federal government return powers to tax income to the states.

Despite being written over a decade and a half ago, the papers remain relevant to taxpayers, tax administrators, and students of tax law, and for that reason they are reexamined in this book.

At the time these papers were written, predictions were made as to the outcomes of legislative changes adopted at the time. In particular, predictions were made with respect to Australia’s GST legislation, which was enacted in July 2000. In 2016, the outcomes of sixteen years of the legislation were compared with the predicted likely outcomes suggested in 2000. It can be noted that by and large those predictions have proved accurate. The GST never really achieved the promised outcomes.

Many state taxes were abolished to make way for the federally based GST. One of the principal features of the GST is that the states would be no worse off under the central collection system than when they collected their own taxes. In 2016, the states, in particular Western Australia, continued to protest that they were not receiving their ‘fair share’ of GST revenue.

Generally, this book does not consider the broad range of taxing acts that exist in Australia, both federally and at state level, but rather, focuses on income tax and Australia’s key indirect tax: its GST.

GST is referred to in many jurisdictions as VAT, and Australia has modeled its GST legislation based on GST/VAT regimes found in other nations. Part II examines Australia’s proposed GST legislation as it was in 2000 and compares it to the then recently introduced VAT of the Cook Islands.

The Cook Islands jurisdiction is of significance to this book as it provides a common thread throughout the papers. Not only is the country’s VAT used for comparative analysis, but its rather simple, but effective, income tax legislation is also compared to the extremely complex Australian income tax acts. In addition, landmark court cases such as the Spotless case were focused on the use of such trusts incorporated in the Cook Islands.

For many years in the twentieth century, the Cook Islands was also used as a tax haven by Australian residents and corporations to reduce their taxation burden by way of offshore trading trusts, considered in Part I.

However, in 2009, the Cook Islands entered into information and tax sharing agreements[13] with Australia which effectively terminated the use of offshore trusts in the Cook Islands as a tax avoidance vehicle for Australian taxpayers. Therefore, the Cook Islands is no longer a ‘tax haven’ for Australian taxpayers.

It is suggested that Australia may have moved to a new century in 2001, and celebrated, if anyone noticed, the centenary of income tax in Australia, in 2015, but old habits and attitudes of taxpayers and administrators remain entrenched. Taxpayers are as reluctant to comply with the concept of the compulsory payment of monetary contributions to governments in the twenty-first century as they ever were.

1.2              Structure

The book consists of four parts as each paper is presented as a separate part. The papers are not in their original sequence. Rather they have been placed in a thematic sequence. The structure is designed to provide background and context from the earliest tax planning corporate structures of trusts to an examination of indirect sales taxes—Australia’s GST—which leads to the use of offshore trading trusts and other tax avoidance schemes used by Australian taxpayers up until the late 2000s.

Finally, the book considers measures taken by various Australian governments to reform taxation systems to reduce fiscal leakages from government revenue through financial structures principally designed to reduce or avoid the imposition of tax.

PART I              The Common Law and Taxation of Trusts in Australia in the Twenty-First Century;

PART II               International Aspects of the Australian Goods and Services Tax (GST);

PART III               A Critical Analysis of Tax Avoidance Schemes in Australia; and

PART IV               The Apparition of Tax Reform: A Paper That Examines the Issue of Taxation Reform in Australia.

Figure 1 illustrates how the papers interrelate to develop the historical examination of tax planning in Australia. The problems of the past continue to elude the federal governments of the twenty-first century. Despite entering into a second century of federal tax in Australia, implementing a tax system that is fair, simple, and efficient appears to be out of the reach of governments.

Figure 1: The relationship of Parts I–IV

1.3              Section Outlines

PART I              The Common Law and Taxation of Trusts in Australia in the Twenty-First Century

This part proposes that the concept of the ‘trust’ held for over a thousand years under the British legal system is drawing to a close. Education and legislation are heralding the demise of that ancient and noble institution in the Australian context. It also puts forward various alternate solutions to the identified problems.

By definition, the term ‘trust’ expresses honor, reliance, justice, and friendship. It implies an honorable relationship under which the property of one, the beneficiary, is placed in the control of another, the trustee. Arising from the days of William the Conqueror, trusts have been established largely from the desire to preserve the title of the medieval baron.

The knights and barons of medieval England did not trust their descendants to manage their titles in a favorable fashion, but suspected they would slowly but surely allow the decay of property that the barons had fought long and hard to establish. They sought to prevent that by removing control from their descendants and placing it in the hands of ‘trusted’ persons. In doing so the knights and barons hoped to retain their estates intact despite the vagaries of their children.

Various types of trust have come to be recognized in modern British law, yet all have the same final purpose, that is, to allow their beneficiaries to enjoy and profit from the estate while the ‘trusted person’ retains control of the trusts. In modern times the focus of trusts has shifted somewhat from the preservation of property to the alienation of income and hence taxation.

Australian taxation law has continued to attempt to tax the income and property of these trusts with varying degrees of success. A series of Australian governments has enacted and proposed legislation to pierce the trust structure and tax the income in the hands of the beneficiaries. Where the beneficiaries cannot be readily identified or ascertained, and therefore taxed, legislation has been set in place to make the trustee responsible for the tax burden.

It is a matter of conjecture as to whether or not parliamentarians are serious in their attempts to tax the income of trusts as they themselves are quite often the beneficiaries of such trusts. Trust income arising from personal exertion, whereby income earned by an individual is attempted to be transposed into earnings of a trust, has been vigorously attacked in recent years.

The taxation of ‘interposed entities’ continues to be at the forefront of legislators’ minds. The problem is that without dissolving the original intention of the trust, that is, to manage property, it is difficult, if not impossible, to distinguish between a ‘genuine purpose’ and a ‘tax avoidance scheme’. The concept of using trusts as tax avoidance schemes will be further examined in Part III.

A serious failure of the taxation of trusts is that while income must be distributed to the beneficiaries, losses cannot be. Trust losses serve only to diminish the corpus or capital of the trust. Therefore, there is little benefit from loss-producing trusts to other taxpayers.

The complexities of administration and stewardship liabilities of the trustee to the beneficiaries have long been substituted by the modern corporate structure of registered companies. Corporate bodies are recognized by law as separate legal entities and are treated as such as taxpayers for taxation purposes. Examination of the taxation law applicable to companies is outside the scope of this book, but their existence as alternative trading structures is recognized.

In addition, the previous taxation benefits of income splitting (and thereby reducing individual taxation burdens) are coming to an end. Therefore, for trading purposes, trusts are no longer considered the optimum business structure.

Furthermore, as beneficiaries are becoming more legally aware, they realize the property of their parents has been transferred to them. There are many instances where children are insisting on their legal right to benefit from the use of trust property. Parents are being faced with either having to relinquish ownership and control of ‘their’ property or admit that the structure is simply a means of avoiding tax and pay the consequences.

This book proposes to demonstrate that the concept of the ‘trust’, held for over a thousand years under the British legal system, is drawing to a close. Education and legislation are heralding the demise of that ancient and noble institution in the Australian context, and the paper concludes putting forward various alternate solutions to the identified problems.

It is noted that O’Connor’s 2016 article considers most of the points raised in this book.[14] He considers the powers and duties of trustees: their appointment, removal, and death; their relationships with third parties; as well as their beneficiaries and their taxation liabilities. He concludes that there are a number of pitfalls for trustees and tax practitioners and states:

The challenge for tax practitioners is that all this complicated [Australian] trust law is often relied on by the Commissioner [of Taxation] when push comes to shove. Cases like Clark[15] and Kelly[16]clearly show that the [Australia Tax Office] ATO will apply the ‘blowtorch’ to test the legal effectiveness of transactions and explore issues such as a trustee’s right of indemnity where there are disputes about tax outcomes from particular arrangements.[17]

His