"Further, in some cases there appears to be intent to construct complex trust arrangements." The report, started in 2016 and delivered to the ATO in October last year but released under freedom of information laws earlier this month, found Australia is an international outlier with the number of trusts in the country expected to reach one million early next decade. It was commissioned by the ATO to look at possible issues around trusts, through which $340 billion income flowed in 2013-14, amid concerns they are being used by some to minimise or avoid tax liabilities. It found that the interaction between trusts and tax law is being manipulated with a conservative estimate of between $672 million and $1.2 billion a year being sheltered in trusts. But the total amount, the researchers found, could actually be "several billion" dollars annually.

This includes the "income tax shuffle" under which the difference in the legal definition of income between trust and tax law is exploited. Trust beneficiaries are liable for tax on amounts they actually do not receive. The researchers told the ATO there were perfectly legal cases of income differences between trust and tax law but in many cases operators of trusts were going out of their way to maximise the possibility to shuffle around their liabilities. One of their main aims is to escape the top personal income marginal tax rate of 47 per cent, reaching the corporate tax rate which for medium to large sized businesses is 30 per cent. Report warned a cut in the company tax rate could encourage more people to use trusts to reduce personal tax. Credit:Tanya Lake The researchers talked to tax and legal experts who conceded trusts were being used by high wealth individuals to slash their tax rate.

"The majority of participants conceded that the disparity between the top marginal tax rate

and the company tax rate is a significant motivator for the use of trusts," they found. "For those taxpayers who have sufficient wealth and/or income that may be subject to the top marginal tax rate, there is an incentive to set up structures that involve companies and trusts so as to be able to accumulate (and in some circumstances distribute income) wealth at a lower tax rate of 30 cents on the dollar." The researchers cautioned that the incentive to use trusts to lower the tax burden on high income earners would increase if the corporate rate was reduced. The cost to the tax system in foregone revenue would grow as the corporate rate fell. Apart from lost revenue, the report found the compliance cost to the Tax Office was high because of the vast resources used to examine trusts.

In some cases, the use of more than one trust to move income and tax liabilities was increasing which made policing of the sector more expensive and complex. Since a taskforce focused on trusts was set up in the 2013-14 federal budget, the ATO has raised almost $1 billion in liabilities, collected $283 million in taxes and seized $55 million worth of assets under proceeds of crime laws. Sixty-two audits, 864 reviews and two convictions for serious tax fraud have flowed from the taskforce which has now been rolled into an overall tax avoidance taskforce. The ALP is going to next year's federal election promising to tax distributions from discretionary trusts at a minimum rate of 30 per cent in a move it estimates will raise $4.1 billion over four years and $17 billion over a decade. Labor's Andrew Leigh says action has to be taken on use of discretionary trusts. Credit:Elesa Kurtz