Trusts

'The Common Law and Taxation of Trusts in Australia in the Twenty-First Century' by Alexander Robert Fullarton from 2001 argues that

the concept of the ‘trust’ held for over a thousand years under the British legal system is drawing to a close. Education and Legislation is heralding the demise of that ancient and noble institution in the Australian context. The Paper puts forward various alternatives and solutions to the identified problems. 

The term ‘trust’ by definition expresses honour, reliance, justice and friendship. It implies an honourable relationship under which the property of one, the beneficiary, is placed in the control of another, the trustee. The Knights and Barons of Medieval England did not trust their descendants to manage their titles in a favourable fashion but suspected they would slowly but surely allow the decay of property that the barons had fought long and hard to establish. Various types of trust have come to be recognised in modern law. 

In modern times the focus of trusts has shifted somewhat from the preservation of property to the alienation of income and hence taxation. Australian taxation law has continued to attempt to tax the income and property of these trusts with varying degrees of success. Series of Australian Governments have enacted and proposed legislation to pierce the trust structure and tax the income in the hands of the beneficiaries. Where the beneficiaries cannot be taxed the trustee is responsible for the tax. 

For trading purposes trusts are no longer the optimum business structure. The previous taxation benefits of income splitting (and thereby reducing individual taxation burdens) are coming to an end. Trust income arising from personal exertion, whereby income earned by an individual is attempted to be transposed into earnings of a trust, has been vigorously attacked in recent years. The problem is that it is difficult to distinguish between a ‘genuine purpose’ and a ‘tax avoidance one’. 

As beneficiaries are becoming more legally aware they realise the property of their parents has been transferred to them. Parents are being faced with either having to relinquish ownership and control of ‘their’ property or admit that the structure is simply a means of avoiding tax.

Fullarton's suggested 'outcomes' are -

Constitutionally, the Australian Federal Government does not have power to legislate with respect to Trusts other than indirectly by way of matters arising to the taxation implications. The legislative power over Trusts remains in the hands of the States. However a brief history of successive transfer of legislative power from the States to the Commonwealth government indicates that a Federal ‘Trusts Act’ may be inevitable. The Labor Whitlam Government started the Federal Government down the road of ‘centralisation’. The company’s legislative impasse clearly demonstrates the frustration with which successive Federal Governments have been plagued. The problem began with the High Court decision in 1908 in the Huddart Parker and Co Pty Ltd v Moorhead case and has not yet been resolved with the introduction of uniform company’s legislation despite continual attempts over ninety years. From the outset of Federation, the Commonwealth of Australia was envisaged as a servant of the States. The enactors of the Constitution deliberately limited the powers of the Federal Government such that the States would retain sovereignty and control over all matters other than those specifically handed over to the Commonwealth. Clearly there were matters that in the national interest, a central authority was better able to co-ordinate. For the purposes of uniformity, defence, navigation, currency, quarantine, foreign policy and other like matters were placed in the hands of a ‘central authority’. Almost immediately clashes and faults began to appear in the intent and the legal enforcement of the Constitution. The decision of the Huddart Parker and Co Pty Ltd v Moorhead case demonstrated what can happen if rules are followed to the letter and if lawyers argue issues line-by-line and word-by-word. The matter of the Commonwealth power to levy income tax is itself a pivotal point in Australian legal history and arguably the subject of voluminous debate. Discussion of this point is outside the scope of this paper but it is important to note briefly the essential elements by which the ITAA 1936 came into existence, its continuance and the ramifications thereof. ...

It is established that once the States hand over sovereignty or authority to the Federal Government they will never retrieve them. Much debate and many cases have been fought over the matter. That debate is also outside the scope of this paper but is mentioned in order to establish the direction that Commonwealth Legislation is likely to take.

At the core of legislative direction is the Commonwealth’s new found desire to control the States absolutely. Some commentators would argue that the desire is hardly new and has existed since the 1880’s. Conspiracy theorists would have us believe that the dissolution of State Governments absolutely is the ultimate aim of the Federal Government. Whatever the truth of that thought or ultimate plan, if indeed one exists, the title of Father of Australian Centralisation almost certainly goes to Edward Gough Whitlam, Prime Minister of Australian from 1972 until his dismissal on November 11th 1975. ...

It was that knowledge and awareness of the ‘shortcomings’ of the Constitution that brought him to the answer of the conundrum of ‘how can the Commonwealth with its powers limited by the Constitution, control the States and by force if necessary?’ The solution to the problem was to use the Federal constitutional powers over foreign policy. The Federal Government under its foreign policy powers simply executed international agreements which became ipso facto binding on the States. World Heritage and Fishing agreements, United Nations charters and policies set the starting point for the slow but certain wresting of control from the States to the Commonwealth. Consecutive governments were not as blatant as the Whitlam Government but none of Whitlam’s agreements were ever rescinded. On other occasions the Commonwealth has resorted to stealth or outright blackmail. The population of Australia may have thought the Whitlam era was over and history would never repeat itself. History has a nasty habit of repeating itself and the Howard Government is actually succeeding in areas where Whitlam didn’t venture, maybe he didn’t have time.

Successes of centralisation of power by the Howard Government are typified by the issues outlined below:- Gun control - Through the use of the ‘Port Arthur Massacre’ the government used the emotive opportunity to bring in uniform and ‘acceptable firearms controls’. The term acceptable meant acceptable to the Commonwealth.

Many States and their populations disagreed, for example in Western Australia, which had it own effective firearms legislation, or the Northern Territory and Queensland which had none, but saw rampaging gunmen as a city problem. This was achieved as a result of the removal of the powers to raise income tax as discussed above. The States were then left at the mercy of the ‘. . . Commonwealth by the threat of a loss of Commonwealth grants.’

It is alleged in 2006 that statistics of crimes involving firearms have been unaffected by the introduction of the gun control measures from the trend prior to such legislation. That outcome is outside the scope of this paper however the relevant element is the inevitable drift in legislative control from the States to the Commonwealth government.

Tied financial grants - The financial control over the States through the use of Section 96 of the Constitution has become a greater and greater weapon for the Commonwealth in its bid to control the States. As the power to tax is shifted from the States to the Commonwealth the States become more reliant on the benevolence of the Commonwealth for funding. Section 96 was not written with the intent that its use would ultimately serve as a weapon to destroy the States.

No one could have envisaged the transfer of taxes to the Commonwealth that has taken place over the past hundred years but that is the outcome. Section 96 has been drafted in such open terms that the Commonwealth ‘. . . may grant financial assistance to any State on such terms and conditions as Parliament thinks fit.’ Section 96 was used blatantly to force the States to comply or have funding withheld. 

Native title issues - The Commonwealth does not have any authority over land administration or titling. The Commonwealth has the right to acquire land on just terms, or to make special laws for the people of any race.149 It does not however have the power to dictate as to the alienation, encumbrances and transfers of Crown land. That is the province of the States as ex-colonies and founding members of the Commonwealth.

Through the 1967 referendum and the Mabo legislation the Commonwealth is imposing its will on the States to accept ‘Native Title’. Some States and chiefly Western Australia are opposing the Commonwealth on this issue but there is no doubt that despite all argument to the contrary, the Commonwealth will succeed. The all consuming power of Section 96 will overcome any obstacles in this regard.

Revenue and licensing of alcohol, tobacco and fuel - A clever ruse that reinforced Commonwealth powers under section 90 of the Constitution, a gain by stealth rather than an exercise of legal powers. The writer is an ex-quarantine officer of the Commonwealth Health Department and as such is aware that it was common knowledge amongst Commonwealth Quarantine and Customs officers that the control and collection of monies by the States as taxes on alcohol, fuel and tobacco was unlawful. The Constitution forbids the levying of duties by the States which is expressly a province of the Commonwealth.  The Commonwealth by way of duties and excises taxes alcohol, tobacco and fuel. For over sixty years the States also taxed those products by way of licenses based on sales. It was a comfortable but not always popular arrangement. Though many lawmakers and enforcers knew of the illegality, all chose to ignore it as it gave the States a degree of financial independence.

In 1994 and 1995 two duty free store owners in New South Wales, went out of business. The matter would have achieved no further significance had it been left to lie at that. However a curious legal challenge was to unfold. For some unknown reason a pilot was arrested for ‘smuggling’ tobacco from Norfolk Island to New South Wales. The ‘smuggling’ practice was so well organised that purpose-built transport aircraft were used for the regular deliveries.

That Customs became involved in the incident is mystifying as the practice had existed for many years. The owners of the aircraft successfully defended the charge as the tobacco was simply being transported between States and not imported into Australia for the first time. That the complex system of importation and transportation was in place to avoid duty is irrelevant, the practice was lawful.

By coincidence, the owners of two duty free stores became embroiled in an action with the New South Wales government over the State levies by way of licensing. Legal representatives for the parties became aware of the importation case and took action in the High Court to have the convictions for the breaches of the Business Franchise Licenses (Tobacco) Act 1987 (NSW). Though the verdict was contrary to precedents set in Dickenson’s Arcade Pty Ltd v Tasmania (1974); Dennis Hotels Pty Ltd v Victoria (1960); Philip Morris Ltd v Comr of Business Franchises (Vic) (1989); Capital Duplicators Pty Ltd v Australian Capital Territory (No2) (1993), it was held that the State could not impose such levies and that they constituted an excise provided by S 90 of the Constitution. 

The difference being the manner in which the licenses had been based, in New South Wales the fee was based entirely on the total value of sales rather than a set license fee basis and therefore found to be a tax. The only action the New South Wales government had to take was to let the action stand ignore the lost revenue and reset its licensing system back to levels successfully held in the Dickensons and other cases. There the matter may have lay undisturbed for another sixty years but in an interesting political move the Howard, Liberal Government encouraged the Carr, Labor Government to allow the matter to go before the full bench of the High Court even though the plaintiffs’ summons for reference to the Full Court had been dismissed by Kirby J. The Howard Government even financed the legal challenge as under S 96 of the Constitution the Federal Government can grant financial assistance as it thinks fit. Surely the Carr Government should have been aware of ‘Greeks Bearing Gifts’. The outcome was obvious to even the most inexperienced of constitutional law students. The Carr Government was soundly beaten and the State taxation issue sent into disarray. The Howard Government enacted legislation to tax alcohol, tobacco and fuel to provide collections through Federal treasury. The guise is that the tax will be collected on behalf of the States. In fact the States were collecting their own revenue and then became even more dependant on the benevolences of the Federal Government and S 96.

The reader may well wonder what those examples have to do with the future legislation of Trusts. All of the foregoing cases are examples of deliberate and progressive moves to shift control and sovereignty from States to the Commonwealth. By concentrating on one area and then the next, the Commonwealth has managed to extend its control and influence way beyond those powers prescribed in the Constitution.

Many of the above events and other political moves, culminating in the introduction of the GST legislation, will be the final nail in the States’ coffins. Without an independent source of revenue the States are now at the mercy of the Commonwealth. The GST revenue - sharing arrangement with the States is by no means final and binding.

The overwhelming power of S 96 can be used at any time to counter any moves of financial independence and GST rates can be altered. The disparity of fuel pricing between the States particularly that of Western Australia to Queensland is a clear indicator that the States must comply with Federal wishes if they are to satisfactorily finance their maintenance and construction projects. On the other hand if the Western Australian and Queensland 2001 election results can be used as a yardstick, the electorate will have their revenge at the forthcoming Federal election. Australia may not be a true democracy in that the choice of governing group is limited to one of two political parties. The Howard government can take little solace from the alternative being the relatively discredited Labor Party. The Liberal party will not be forming the governing party after 2001.

The authority over Trusts is currently in the hands of the State, but once the new entity taxing legislation is enacted, it will only be a matter of time before power over Trusts is handed over to the Commonwealth, as a matter of uniformity, convenience or duplicity of powers. That the States cannot wrest back powers granted to the Commonwealth is an historical fact. Interestingly the Western Australian experience demonstrates that once Federation was achieved, and the Constitution enacted, the option of withdrawing from the Commonwealth has also been closed to the States.

Historically, there is no doubt that the Howard Government will meet its demise at the very next Federal election.  There is also no doubt the successive Federal Governments will not reverse the trend towards centralisation. The move to entity taxation will eventually see the demise of the Trust, an institution that survived a thousand years are was one of the pinnacles of British law. Trusts may continue to be used for some of the purposes originally conceived that of the dispersal of estates and the like, but as a taxation vehicle the days of the Trust are all but over. The writer predicts that eventually Commonwealth legislation will supersede the State legislation relating to Trusts.

The effect of centralised legislation will be that trust legislation will more closely resemble current New South Wales and Victorian legislation than Western Australian legislation. Past experience and historical fact dictate that the majority of Parliamentarians are influenced by New South Wales and Victoria as they are the main population bases of Australian Society. The legal attitudes of the Federal Government tend to reflect those facts rather than the desire to seek more acceptable alternatives. The fears held by the smaller States that Federalisation would eventually come to mean domination by New South Wales and Victoria will become a reality. It is suggested that the prudent practitioner begin studying New South Welsh and Victorian legislation if he/she is to remain conversant with trust legislation.

It is also likely that the changes to the taxation of trusts will eventually render them to antiquity for business purposes. Many foreign uses of trusts exist and are formed purely for use as tax avoidance vehicles. These foreign trusts are widely promoted by newly formed ‘Tax Havens’. Many of these are ex-British protectorates or colonies such as Vanuatu, the Cook Islands and the British Virgin Islands. These countries promote tax avoidance as a commercial enterprise and have legislated accordingly. The promotion as use of such trusts is becoming more and more prevalent as the use of the Internet and e-commerce grow with the ever expanding use of computer technology. Such trusts are mentioned as alternative future directions of trust law in an international sense, the study of which is extensive and outside the scope of this paper.