Tax avoidance gets unpleasant. Some families use dying people to start up avoidance trusts.
By the middle of 1977 the ATO had come to learn of an emerging rash of tax avoidance schemes. One scheme involved multiple trusts created by will.
In 1964, when parliament enacted anti-avoidance legislation following the report of the Ligertwood Committee, one set of measures concerned the problem that taxpayers had been setting up multiple trusts for the same beneficiary or group of beneficiaries. The income was directed to be accumulated and the income of each trust was separately taxed under section 99 as though it was the income of an individual. Under the system of graduated rates of tax, each trust paid little or no tax. Were the incomes to be aggregated, much higher tax would be paid.
The solution adopted in 1964 was to bring in a new section 99A under which accumulating trust income was taxed at a penalty rate of 50 per cent. Such income would not be taxed under section 99A, but at individual rates under section 99 if the Commissioner, on the basis of guidelines in the law, exercised a discretion to do so. The intent was that 'legitimate' trusts would be taxed in the old way, but tax-avoidance-inspired trusts would be taxed at the penalty rate. (The resort to 'Commissioner's discretions' in this and other parts of the 1964 measures attracted very considerable controversy at the time.)
Based on a view that the avoidance problem was confined to trusts created by a person during his or her life, the 1964 measures excluded trusts created by will from the scope of section 99A, always leaving their accumulating income to be taxed under section 99. This view was exploded by practices that emerged in the 1970s.
In these cases a number of family groups found someone (outside the family) who was near death who would execute a will or codicil in which (on the basis of seed money provided by the organising family) multiple accumulation trusts would be set up for family members. On the basis of this start-up money, it was relatively easy for the family to arrange that after the person's death, substantial income or property would be channelled to the trusts. Despite that, they satisfied the test of being trusts 'created' by will, thus remaining under section 99 and not exposed to the tax ravages of section 99A.
Ministers were advised in July 1977 in Submission 1550:
As an illustration, 2 aged people who were inmates in a home for aged persons executed wills in 1973 in which each created 500 trusts for members of an unrelated family. One of the testators in fact died only 14 days after making the will and the donee family arranged, after the death of the deceased, to divert income into the trusts. Another case has currently been referred to the court to determine whether an aged woman was mentally capable of executing a will, very shortly before her death, in which she established 100 trusts for the benefit of strangers.
While it was some time before other anti-avoidance proposals contained in Submission 1550 were implemented, ministers acted quickly to deal with these egregious practices. The Income Tax Assessment Amendment Act (No. 2) 1977 required that trusts created by will were exposed to tax under section 99A, with the Commissioner's discretion available for appropriate cases to be taxed under section 99.
In his second reading speech on 20 October 1977 Treasurer Lynch discussed the government's intentions about tax avoidance schemes generally, then continued:
Our decisions in one area - trusts - are connected closely with Budget measures and they are thus contained in the legislation now being introduced. When in 1964 the Government of the day brought in extensive anti-avoidance legislation, it introduced a special rate of tax - 50 per cent - on some trust income to which no beneficiary is presently entitled. Under section 99A of the Income Tax Assessment Act, that tax applies where the trust is clearly for tax avoidance purposes and, under the 1964 legislation, deceased estates were excluded from it. Unfortunately, that exclusion has given rise to tax avoidance by most unpleasant means. Some family groups, few in number I am pleased to say, have arranged for unrelated aged people who are expected not to live for any length of time, and who have little in the way of assets of their own, to set up multiple 'shell' trusts under a will for the benefit of members of the sponsor family.
On the death of the aged person, the family channels income into these trusts which, because they qualify as deceased estates, are outside the scope of the special rate of tax under section 99A. Effective for the 1977-78 and subsequent years such trusts will be dealt with by bringing deceased estates within the scope of section 99A. However, I emphasise that deceased estates of the ordinary and traditional kind will continue to be assessed by the Commissioner of Taxation under section 99 of the Income Tax Assessment Act.
As a separate measure, the rate of tax under section 99A was increased to the maximum rate of personal tax, 60 per cent, because some groups had been using the section 99A rate of 50 per cent to shield family income from that higher maximum rate.
Sections within Chapters 11-20
Last Modified: Wednesday, 16 June 2010