Tax for trusts - estate planning and wealth management

In order to understand the taxation of trusts in estate planning and wealth management, you first need to get a basic grasp of the relevant tax legislation.

The tax laws, (including capital gains tax) relevant to the taxation of trusts used for estate planning and wealth management purposes is mainly contained within two acts. These are;

-          The Income Tax Assessment Act 1936

-          Income Tax Assessment Act 1997

The ITAA36 is gradually being rewritten into the ITAA97, and new matters are generally now added to the 1997 act. The reason for rewriting the act is that amendments over the years have made it thousands of pages long, and very complex. 

These two acts differ in structure. ITAA36 is compartmentalised into parts (mainly subdivided into divisions and subdivisions, with schedules). ITAA97 is divided into chapters with parts and divisions.

The key provisions for taxation liability and capital gains tax have been rewritten and so are in the ITAA97.

However, the provisions for general liability for trusts estates and beneficiaries, as well as companies, partnerships and trusts remain in ITAA36, although some discrete parts have been rewritten within the ITAA36, but in the ITAA97 style. In some cases, a plain English rewrite of an old law appears to make a major change in the meaning of the law.

Apart from where provisions which are not rewritten laws are inserted into ITAA97 (like the new rules enacting post 1997 tax reforms or new anti-avoidance provisions ) the rewritten legislation is not meant to bring about any difference in the tax result or the effect. To date, it is not clear whether courts will ignore what could appear to a significant difference in drafting.

Estate planning deals with making provision for the distribution of one’s property on death. The normal means of addressing this responsibility is with a will. But the exercise may need to go much further than that in many situations. It may also include the succession of other entities the person may control, including super funds and family trusts. It will also often involve tough decisions like passing the control of a business and other assets to certain family members and excluding others.

The income tax laws make the primary framework for these matters. However, there are other factors which may shape an estate planning exercise. These could be the morals and ethics the guides that guide the relevant individual’s desires and goals.

However, tax laws remain key because they provide the incentives and restrictions involved in and estate planning decision making.