Trusts here to stay despite mounting complexities, says KPMG partner

KPMG Enterprise, partner, Craig Marston has said while complexities and increased regulatory scrutiny are driving businesses away from the use of trust structures, trusts will remain a part of Australia's tax system for a long time to come.

Speaking at the Tax Institute's NSW Tax Forum, Marston said businesses in recent years have increasingly moved out of trust structures and into corporate structures instead, with the use of trusts becoming more complicated and onerous from a documentation perspective.

"What I'm finding in my practice, particularly in recent years, is that I'm spending a lot of time moving businesses out of trusts, particularly because of issues such unpaid present entitlements (UPEs) and also issues around losses," said Marston.

Marston said trust taxation has been set up under very complex statutory provisions as opposed to companies, where in many respects, the taxation can be quite simple.

"It's very predictable what your tax rate will be at the start of the year and end of the year. The same can't be said for trusts."

Marston explained that the ATO's increased focus on applying anti-avoidance provisions such as section 99B and section 100A has meant that trustees now need to devote a lot more time and energy to documentation, particularly for those carrying on businesses.

One of the other difficult aspects of using trusts for businesses, he said, is the fact that decisions about distributions must be made by 30 June.

"How ridiculous is it that as of 30 June, with limited information, we need to decide to whom we're going to make our trust or income presently entitled? At the time we need to make trustee resolutions we don't actually have all of the information," he said.

"In fact, it's very unlikely that at 30 June you would have any information, particularly for a business that's being carried on because it sort of becomes a function of profit.

"If I had a discretionary trust with [only] passive investments, I probably would have a pretty good sense by 30 June but certainly not for a business. This goes to that tension between using trusts for passive investments and using trusts for businesses."

Marston said despite the challenges with using trusts for businesses, he still thinks its worthwhile using trusts for passive investment activities.

While there have been previous policy threats to increase the taxation of trusts such as the Bill Shorten's proposal to impose a 30 per cent tax rate on family trust distributions in 2019, he said its likely to be a long time before these types policies are adopted.

"I think it'll be a number of years before we get to a 30 per cent tax rate [for trusts]. If you look at what's happening with superannuation and the pushback that's happening there in relation to the $3 million, things like that are fundamental to our tax system and very difficult to change," he said.

"Trusts are so pervasive, we have so many trusts that I can't see them going away. I can't see income splitting going away."

Marston said in the context of running a business, trusts may still be an effective option for starting out but as the business grows, business owners and their advisors may want to look at moving into a corporate structure instead.

Speaking in the same session, KPMG associate director Arda Ahmed stressed that taxpayers should ensure they receive proper advice and understand what's happening given the complexities surrounding trusts.

"Understand your roles, your responsibilities and your obligations," said Ahmed.