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Accumulating Income

15.25. The scheme of Division 6 involves taxing the trust on that part of the income of the estate for tax purposes which is not taxed in the hands of a beneficiary or in the hands of the trustee as agent for a beneficiary. The phrases ‘accumulating income’ and ‘accumulated income’ are used in this chapter to refer to such income. They are not intended to extend to income to which a beneficiary is presently entitled that is retained by the trustee.

15.26. There are two questions to be considered in this regard. The first is the appropriate treatment of distributions made from accumulated income already taxed to the trust; the second is the rate of tax to be applied in taxing the trust.

15.27. Although not the subject of an express exemption, it is a clear inference from Division 6 that a distribution from accumulated income which has been taxed to the trust is not subject to tax in the hands of the beneficiary receiving the distribution. The argument in any case would be that income which has been accumulated, more especially when it has been taxed, has ceased to have the quality of income when it is distributed; it is, in effect, received by the beneficiary as capital.

15.28. It would therefore be a radical departure from the scheme of Division 6 to follow the scheme in relation to companies and tax the beneficiary on distribution, with appropriate credit for tax paid by the trust. The Committee does not favour any such change. The giving of credit, which ought in principle to be a full credit, would involve major administrative difficulties.




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15.29. If there were a strong case on equity grounds for this radical departure, these administrative difficulties might not be thought too high a price to pay. The basic approach of Division 6 to the taxing of trust income is the allocation of that income to the beneficiaries who alone are taxed on it. The equity question therefore arises only in relation to income that cannot be allocated because there is no beneficiary with a vested claim to it. In the case of company income, there will almost invariably be shareholders with vested interests in the income at the time it is derived by the company; and where they are low-income shareholders, taxing the company on undistributed profits and not taxing the shareholders on later distribution is inequitable. The Committee does not, however, see a similar case in equity for attempting to relate the tax on accumulated income of a trust to the tax situation of persons who, at the time income was derived, had no more than contingent interests in that income.

15.30. What is a proper rate of tax to apply to the accumulating income? Until 1964 such income was taxed in all cases as if it were the income of an individual. In that year an alternative was introduced whereby the income is in some circumstances subject to tax at a flat rate (currently 50 per cent) unless the Commissioner is of the opinion that it would be unreasonable to tax it in this way. The alternative was introduced to overcome tax avoidance practices to which the Ligertwood Committee drew attention in 1961. Bizarre possibilities in minimising tax are introduced when multiple incomes, each separately taxed, can be created by setting up a multiplicity of trusts, all in the interests of one person.

15.31. As a measure to defeat tax avoidance, the alternative provision has serious shortcomings. For one thing, the rate of 50 per cent which Parliament has set leaves a tax advantage where the marginal rate of the person who it is intended will ultimately receive the income is higher than 50 per cent. For another, the provision has no application to a trust created by a will or resulting from an intestacy. In general the Committee sees no reason for distinguishing between the inter vivos trust and the testamentary trust. A multiplicity of testamentary trusts in the interests of the one person is not unlikely. In any event, the inter vivos vesting of assets in a testamentary trust, which has been held not to give rise to a new trust, defeats whatever purpose might be served by the distinction.

15.32. The Committee recommends that the rate of levy on income taxed to a trust should, in general, be the maximum marginal rate applying to an individual taxpayer. The rate will discourage the setting up of accumulation trusts having tax avoidance as their object; moreover, where there is no beneficiary with a vested interest there is, except in some circumstances which might be the subject of special provisions, no obvious reason for preferring any other rate. Possible special provisions applying another rate are considered in the following paragraphs.

15.33. Where the estate of a deceased person is in course of administration and income is taxed to the estate, it is not unreasonable to regard the estate as a projection of the personality of the deceased. This would involve retaining the present law by which the income in question is taxed as the income of an individual. Similar treatment should continue to be given, too, to moneys received by the estate that would have been income of the deceased person had he received them in his lifetime: these are treated as income of the estate under section 101A.

15.34. It follows from paragraphs 15.16–15.24 that, except where an election is exercised, the excess of income for tax purposes over income for trust purposes will be taxed as income of the trust. One might be tempted to argue that in situations of this kind there is unlikely to be any need to discourage tax avoidance by the prospect of


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having to pay the maximum marginal rate. But if a lesser rate of tax is applied to the excess, there would still be scope for tax avoidance, for example through the adoption by the trust instrument of trust accounting rules designed to limit the amount of trust income. There will nevertheless be cases where, as in the illustration in paragraph 15.21 involving the lease premium, the application of the maximum marginal rate to the excess appears unfair. A compromise, in the Committee's view, is for the amount by which the income of the trust calculated in accordance with income tax principles exceeds the income calculated in accordance with trust law principles to be taxed as the income of an individual who is not entitled to any concessional deductions but who is subject to a minimum rate of tax. The minimum rate should be a specified percentage which is less than the rate of 50 per cent at present applied under section 99A. The exception should not be available if the Commissioner reaches the view that the discrepancy between the two amounts of income has been deliberately brought about by a provision in the trust instrument inserted for the purpose of reducing the incidence of income tax.

15.35. The common form of will provides for the accumulation of income and the payment of that income to a child of the testator on the child reaching a certain age or, perhaps, marrying before that age. It seems inappropriate for the income arising from a trust of this sort to be taxed at the maximum marginal rate. The Committee considers that this income should be also taxed as the income of an individual who is not entitled to any concessional deductions but who is subject to a minimum rate of tax. Again, the minimum rate should be a specified percentage which is less than the rate of 50 per cent at present applied under section 99A. This exception should be limited to income arising under a trust created by will to which a child of the testator has a contingent entitlement, being income accumulated during the minority of the child.

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