In this budget, all eyes are on CGT. But Labor’s rumoured family trust tweaks might also help fight tax inequality | Greg Jericho
When it comes to how wealth and high income is taxed in this country, it is not hard to agree with F Scott Fitzgerald’s line that “the rich are different from you and me”,The difference between the rich and the rest is abundantly clear when you look at how most people make money,Whereas most of us get money from salary and wages, those who earn $1m or more a year generate most of their income through capital gains, dividends and partnerships and trusts:If the graph does not display click hereUnsurprisingly, the way millionaires make money makes it much easier to avoid tax – whether through the current 50% capital gains tax (CGT) discount or the complex tax arrangements of trusts,But the government finally seems ready to address the gross inequality in the tax system,As I wrote two weeks ago, the strong rumour is that the CGT 50% discount will be abolished and replaced with the pre-1999 system of only taxing real gain.
But one other significant move that looks set to occur is curtailing the rampant use of family discretionary trusts to limit tax.Discretionary family trusts are tax vehicles that are used to split up income among everyone in the trust and thereby reduce the overall tax paid.They are different from non-discretionary trusts where the benefits are defined, such as ones set up, for example, in wills.Discretionary family trusts allow people to divide up income among those within the trust in any way they like.This reduces tax, because under progressive income taxation, less tax can be paid – for example, if you split $400,000 between four people, you get four goes at the tax-free threshold, four lots of the low-income tax offset and four lots of income to $45,000 being taxed at marginal rates of 16%.
In this example, you can reduce your tax bill by nearly $63,000 – a 43% cut.If the graph does not display click hereDiscretionary trusts are not something most people have any use for; they are not applicable for people who only earn wages – but they are a huge deal among the wealthy.Consider Hudson Financial Planning’s list of “The nine most effective tax minimisation strategies for wealthy Australians in 2025”.No 1 is “family trusts with corporate beneficiaries”.Or what about an article in the AFR that asks that vital question of “How to stop your kids and grandkids being taxed like CEOs”? An answer is “use a family trust”.
Their use has grown significantly over the past couple decade, from 328,725 in 1990-91 to 1.02m in 2023-23.The big growth occurred in the early 2000s, perhaps not coincidentally alongside the big increase in capital gains after the Howard government introduced the CGT 50% discount.In 2000-01, there were 3.3 discretionary trusts per 100 taxpayer.
Now it is up to 5,1:If the graph does not display click hereThe problem of people using trusts to reduce their tax is not new, nor is it small,My colleague at the Australia Institute, David Richardson, has calculated that the annual income generated through trusts is now around $600bn – or equivalent to a touch under a quarter of Australia’s GDP,Back in 2019, the ATO conservatively estimated that the manipulation of the trust and tax laws was costing the government between $672m and $1,2bn a year in lost tax revenue.
And the richest get the most benefit.While the average salary of a person earning more than $1m a year is around 10 times that of someone earning $60,000 to $100,000, the average income from trusts for millionaires is 50 times greater:If the graph does not display click hereNot surprisingly, the biggest beneficiaries of tax breaks from trusts are the richest Australians.Treasury estimates that around 63% of all the income generated through trusts goes to the richest 10%.If the graph does not display click hereThe government is rumoured to be bringing in a 30% minimum tax rate for income in discretionary trusts.This would greatly reduce the benefit of using them to avoid tax.
Farmers always get antsy about talk of trusts, because aside from minimising tax, families use them to prevent the breakup of farms across generation.But the ATO actually differentiates between trusts for primary production and those for non-primary production (ie investments), so this political issue would be pretty easy to solve.Unsurprisingly, conservatives are out circling the wagons.A former Howard government advisor argues in the AFR that it would be all too complex to do, and that absurdly it would only raise “$100m or $200m”.That is rather lower than the ATO’s 2019 estimate of $672m and $1.
2bn.It’s also lower than what Hudson Financial Planning advise can be saved.They suggest “high-net-worth individuals save an average of $145,000 annually using family trusts”.In 2023-23, 14,694 people who earned over $1m had a trust income.Were they to get that average, we are talking $2.
1bn alone from them – enough to nearly double the funding for Tafe,Next week’s budget will no doubt disappoint many for not doing enough,But if the government does introduce a minimum tax rate for trusts, it will have at least finally brought some equity to the system and ensuring the how the rich are taxed is not so different from you and me,Greg Jericho is a Guardian columnist and chief economist at the Australia Institute
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