Back to the trusts debate – again

The debate about whether or not family trusts should be taxed as companies is making headlines again.

Hot on the heels of the speech that Shadow Treasurer Joe Hockey delivered at the Institute’s National Tax Conference back in early April, in which he revived the debate on the taxation of trusts, it appears as though the political heat has been turned up within the Opposition. Many of you will remember this policy proposal was first raised by the Coalition in the early 2000s by then-Treasurer, Peter Costello. More recently, the Shadow Treasurer gave life to the idea again during his speech to the Institute a few weeks back. On both occasions, the policy proposal has lasted the political equivalent of about five minutes. There’s simply too much to lose by seriously considering such a dramatic shift in tax policy, especially in the primary production and small business sectors, where family trusts are commonly found.

But despite that, we should still look closely at how trusts are currently used and whether there is an alternative type of flow-through structure that provides similar legal protections and estate planning opportunities as trusts do. Overseas, the concept of limited liability companies (LLC) is more commonly found than trusts. One of the main benefits of a LLC is that it allows a high degree of flexibility because profits are taxed in the hands of members – rather than at the corporate level. One of the other benefits is that the relevant tax laws would be less complex than those currently in place for family trusts.

While I don’t believe that we need to rush off and put in place LLC structures in Australia immediately, longer-term, we should seriously consider whether alternative structures such as LLCs might have a place in our future tax system. This seems like the perfect topic for dialogue at the upcoming October Tax Forum.

What do you think?