Given the upcoming Four Corners on the election and the story on family trusts, it might be worth revisiting this from Research Manager, Rod Campbell from earlier this year.

Politics and property – how our leaders are among the privileged using legal loopholes to build their wealth

Tax loopholes for some

The first thing to understand is that there are far fewer tax loopholes for avoiding tax on wages. If you work for a living, like most Australians, there are not many tax tricks for you.

If you own assets and earn income from investments, however, things are a little different. How you own the assets is also important. Simply owning your own home is nice, but not as good as owning assets through a discretionary trust, a self-managed super fund, or a family company.

Financial vehicles

A discretionary trust is a way of holding income earning assets where the income stream can be split between beneficiaries. This means money can be directed to the people in the trust who face the lowest marginal tax rates, such as adult children, rather than a higher-earning parent, who faces a higher tax rate.

The income earned from trusts overwhelmingly goes to high income earners. Treasury estimates (page 47) that the top 10% of income earners receive 63% of the income from trusts, while the bottom half of income earners get just 11% of the income.

A self-managed super fund helps reduces taxation because of the various tax breaks for superannuation. For example, an owner might have their business in their self-managed super fund, with the income to the fund being taxed at a lower rate than it would have if it was owned in the business owner’s name.

A family company, like trusts and self-managed super funds, is a vehicle for owning assets. If the assets are owned by a family company, then profits are subject to company tax rates. This can be as low as 25% if the company turnover is less than $50 million per year.

All three of these asset-owning vehicles are entirely legal. And they can have legitimate uses. But they also provide tax loopholes that can be used to reduce the amount of tax someone has to pay and to obscure who actually owns the assets.

Level the playing field

This is fundamentally unfair. These structures for reducing tax are mostly only available to the wealthy. The average wage earner cannot structure their income through such complex tax structures.