As the federal budget approaches, attention is focused on capital gains tax, but economist Greg Jericho highlights another potential reform: curbing the use of family discretionary trusts to avoid tax. In a Guardian column, Jericho argues that these trusts allow the wealthy to split income among beneficiaries, dramatically reducing their tax bills. He notes that millionaires earn most of their income through capital gains, dividends, and trusts, unlike average workers who rely on salaries.
The Mechanics of Discretionary Trusts
Discretionary family trusts enable trustees to distribute income arbitrarily among members, exploiting progressive tax rates. For example, splitting $400,000 among four people can cut the tax bill by nearly $63,000—a 43% reduction. Such trusts are rarely used by wage earners but are prevalent among the wealthy. Their numbers have grown from 328,725 in 1990-91 to over 1 million in 2022-23, with a surge following the Howard government's 50% CGT discount.
Scale of the Problem
The Australia Institute's David Richardson estimates trust-generated income now totals about $600 billion annually—nearly a quarter of Australia's GDP. The ATO conservatively valued revenue loss from trust manipulation at $672 million to $1.2 billion per year in 2019. The benefits are skewed: millionaires earn 50 times more from trusts than those on $60,000–$100,000 salaries, and 63% of trust income flows to the richest 10%.
Proposed Reform: 30% Minimum Tax Rate
The government is rumoured to introduce a 30% minimum tax rate for discretionary trust income, which would significantly reduce the incentive for tax avoidance. Agricultural trusts may be exempted to address concerns about farm succession. Critics, including a former Howard government adviser, argue the reform is complex and would raise only $100–$200 million, but Jericho counters that the ATO's estimate is higher. He cites Hudson Financial Planning, which suggests high-net-worth individuals save an average of $145,000 annually using family trusts. With 14,694 millionaires reporting trust income in 2022-23, the potential revenue could reach $2.1 billion—enough to nearly double TAFE funding.
Jericho concludes that while the budget may disappoint in many areas, a minimum tax on trusts would be a significant step toward tax equity, ensuring the rich are treated more like everyone else.
