King's Own Institute: BUS707 Article Review on Tax Avoidance in Trusts

This report presents a structured literature review on tax avoidance within family trusts, focusing on the Australian context. The analysis begins with a summary of the theory and the progression of the field, highlighting the historical development and current strategies used to minimize tax liabilities. The review then identifies and discusses common and differing themes across four academic articles, exploring topics such as the use of discretionary trusts, the impact of tax avoidance on revenue, and the role of family courts in asset distribution. The report also delves into managerial implications, such as how family companies strive to evade tax, and limitations of the research, including the unreliability of data and the complexity of tax laws. The report references articles that discuss the implications of tax avoidance, the role of trusts in estate planning, and government responses to tax avoidance, offering insights into the economic and social consequences of these practices. Finally, the report concludes with the analysis of the articles and their relation to the topic of tax avoidance and its impact on the Australian economy.

RUNNING HEADER: Applied business research
Applied business research
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RUNNING HEADER: Applied business research
Article review on tax avoidance in Family Trusts in Australia
Summary and progression of the field
Tax avoidance involves the legal utilization of tax in one territory to a person's benefit aimed art
decreasing the total amount of tax payable by methods which are within law jurisdictions.
Various forms of tax evasion are considered to be morally illegal. Many corporations, firms, and
business that participate in the practice are negatively impacted by active customers. Tax evasion
involves efforts by corporations, trusts, business and other entities to evade tax through the use
of illegal means. A business may decide to avoid theoretical means of paying taxes by
establishing the subsidiaries in an offshore trust (Amato 2012, p.637) Family tax evasion can be
done by creating a separate legal entity from the property or business owner. Assets are often
transferred to a new business so the t the gains realized or income generated can be within the
legal entity and not the individual owner. Tax avoidance assets back from 1696. However, over
the years, this theoretical approach has improved with governments coming up with strategies
and policies in order to curb tax avoidance techniques.
In this review the following four articles were extensively used to discuss the field in detail;
1. Bird, Robert, and Karie Davis-Nozemack. "Tax avoidance as a sustainability problem."
Journal of Business Ethics (2016): 1-17
2. Dowding, K. and Lewis, C., 2012. Newspaper reporting and changing perceptions of
ministerial accountability in Australia. Australian Journal of Politics & History, 58(2),
pp.236-250.
3. Mafrolla, E. and D'Amico, E., 2016. Tax aggressiveness in family firms and the non-
linear entrenchment effect. Journal of family business strategy, 7(3), pp.178-184.
4. Xynas, L., 2010. Tax planning, avoidance, and evasion in Australia 1970-2010: the
regulatory responses and taxpayer compliance. Revenue Law Journal, 20(2010), p.38.
Article Themes/findings
Over the years, People save money into self-managed super funds as a popular strategy used to
minimize tax, avoid tax and plan estates. Some of such particular options are shut down and the
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RUNNING HEADER: Applied business research
Australian 2017 budget included various measures enacted to address some of the strategies and
challenges.
Fig 1.1 growth in trust
Various reason for setting up trusts include
Protection from divorce issues
High discretion in the case of trust capital and income being distributed to the available
beneficiaries. The latter involves the actual splitting between two trust beneficiaries. While
policies against avoidance are being applauded by the authorities in charge, it doesn't mean that
tax avoiders will find other channels of avoiding if not evading tax. The Australian Taxation
Office indicates a variety of arrangements that are aggressive towards the tax system
 Avoidance of tax and other obligations completely.
 Optimized rebates
 A rise in the income deductions per month
 Reduction of the family member's taxable income
Literally, there is little to do in commending discretionary trusts. The merits they bring are
minimal since many are limited by their existing destructive and damaging nature or features.
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RUNNING HEADER: Applied business research
According to the article by Bird, Robert, & Karie Davis (2016, p.2-3), trusts are typically utilized
to give money to members of a particular group, normally a family. Under a discretionary trust,
the only available channel a beneficiary will acquire capital or monthly income from the trust is
if the person who is a trustee decides to offer them something in return. Family organizations are
usually included as beneficiaries in order to optimize tax.
The labor party puts high consideration on trusts. This focus is overwhelmingly warranted since
the purpose of trusts is to reduce tax, avoid paying creditors and avoiding the fair share of
property after family relationships have broken down.
As a result of a lack of data, it is quite difficult to approximate the total amount of tax revenue
that is lost in the modern era. However, an estimate of simply losing a$2.1 billion annually in the
income tax through available discretionary trust can be ultimately done.
If a discretionary trust decides to a family trust under the new tax law, it can also lead easily
access various concessional tax rules. These do not exist in any other entities or taxpayers
(Dwyer 2010, p.23)
Discretionary family trust issued largely to frustrate creditors who are individuals that are owned
by the beneficiaries of a trust. A person who is owed money by a certain beneficiary of the trust
cannot make an effort to visit trust or tax authorities so as to settle the prevailing debt. Also even
if the beneficiary has gotten money from the trust initially and there is a high likelihood that
he/she can receive the money in the long run, after releasing from bankruptcy situation which
means not having paid any of their debts.
Unsecured creditors such as suppliers of a family business transacting with a trustee, cannot
settle their debts completely with a trust in case the trustee does not have enough funds in form
of assets. The trustee will mostly be a family company paid to coordinate the trust with less share
of income capital
According to Dowding, K. and Lewis, C., (2012, p.236) indicates reliable data from the
Australian Taxation office, shows that family wealth is held in existing discretionary trusts. Once
a family relationship breaks, one spouse will argue that since the asset funds are in discretionary
trust, nobody has prior claim over them and therefore it would be divided among the rest of the
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RUNNING HEADER: Applied business research
other couples assets. This gives a way of avoiding paying taxes to the relevant Australian
authority.
The family court has more power to choose what can be shared and it normally includes assets
that represent in the discretionary trusts. This is done in case a specific spouse is capable of
appointing or removing a trustee. Conversely, in an instance where a spouse is expelled from the
trust funds, it becomes very problematic for the court to include assets to be shared and pay
taxes.
The trust can also be used in succession planning leading to tax avoidance. This is where an
individual has property to discard and needs flexibility over a given period of time. It permits the
payments to change with demand, needs, and circumstances. For instance, if a trust beneficiary
gets a well-paying job, they could be given less thus leading to tax evasion (Mafrolla & D'Amico
2016, p.178).
Also in the cases of death, putting assets into the discretionary trust of a deceased individual
makes the assets to be tied up for over a maximum of approximately 80years. This will make it
difficult for the assets to contribute to the countries tax.
Findings in Numbers
According to the articles in 2014, there existed approximately 823,447 trusts with assets
estimated to be $3.1 trilkion.78 percent of the trust were discretionary trusts that reused by the
individual who sets up the trust funds.
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RUNNING HEADER: Applied business research
Fig 1.2 the average trust in terms of taxable income
The following themes arose from the research articles;
o The risk involved in correct lodgment of trust tax returns
o Precise and accuracy in ending return tables
o Continued distribution to super annual asset funds
o Inappropriate and unnecessary prior claim of capital benefits by the trust
The article Xynas, (2010, p.78) argues that there exist some options required for tax evasion
reform when it comes to trust. These particular measures can be enacted and implemented while
making owners of a discretionary trust to be free in order to enjoy other available legitimate
merits
The government can opt to impose the company taxation system on those family discretionary
trusts. Due to the existence of refundable franking credit tax offset rule, the activity of taxing
trusts as family companies would not totally offer a solution that typically addresses the issue
involving tax minimization and avoidance.
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RUNNING HEADER: Applied business research
This is because trusts would still have the capability to offer manipulations in the allocations of
money between low-rate beneficiaries. They will be able to change allocations from time to time
and avoid paying tax annually (Richardson, Taylor, & Lanis 2015.,p.44)On the other hand it
would achieve a goal of removing the presence of the capital gains tax discount to the family
discretionary trust
The Australian government can utilize the attribution methodological approach to trust. This is
the same manner that social security systems do in effectively implementing the family law
(Amato 2012, p.637). Under this model, the family member who immensely contributes the asset
in the trust is seen to have ownership of the monthly income and asset funds. This perspective
would highly reflect typical law entitlements for all the spouses and thus reflect their economic
contributions in order to build upon assets. This would make the tax authority to keep track of
the taxable income.
Future research indicates that given the complexity of the laws in Australian income tax and the
prevailing enforcement rules that constitute the Australian Taxation office in various dimensions,
any challenges with this approach are simply solved. It forms the ideal sections of the social
security regime for available asset funds and income test that are needed for one to pay tax and
not evade (Prebble & Prebble, 2010, p.21).
The articles bring out the theme of negative gearing. Those individuals who are in the top
income brackets benefit from carrying out investment strategies like negative gearing. It works
efficiently where taxpayer gets in the high marginal tax bracket. Some individuals have the
ability to legally decrease their income under assessment by income diversion.
The articles also bring out the themes of tax reform, anti-avoidance provisions and tax
compliance aimed at promoting the payment of taxes
Managerial implications
Some of the managerial implications include how family companies dealing with high-quality
products strive to evade tax so as to save capital in order to promote their customer satisfaction.
However, this has been considered unethical behavior since it can lead to the downfall of the
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RUNNING HEADER: Applied business research
entire company management when the Australian law catches up with that behavior (Woellner,
Barkoczy, Murphy, Evans, Pinto, 2010, p.118).
Failure to pay taxes will lead to failure of business since government always support them with
subsidies and incentives. It will also have real-world negative implications in the entire
economy.
Limitations
The articles indicate that trust does not have the capability of capital distribution or revenue
losses to its beneficiaries. In case a trust leads to losses the beneficiaries will not be able to offset
the loss against any taxable income.
The articles indicate that from time to time concerns arise on if the tax avoidance rules apply to
all family trust that is used in taxable income splitting objectives. It is highly unlikely that anti-
tax avoidance rules will apply to commercial and family business dealings. Individuals involved
in business or investment operations will not be affected (Taylor & Richardson, 2013, p.12). A
larger percentage of researchers and advisors argue that trust arrangements are not within tax
avoidance rule, provided that there exist normal commercial reasons for instance asset fun
protection and maximal estate planning. The articles, therefore, indicate that future research is
limited to one dimension. Data and information regarding tax avoidance will be unreliable and
exaggerated. Future research does not account for offering the solutions for end of tax avoidance
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RUNNING HEADER: Applied business research
References
Amato, D.J., 2012. The Good, the Bad, and the Ugly: The Political Economy and Unintended
Consequences of Perpetual Trusts. S. Cal. L. Rev., 86, p.637.
Bird, Robert, and Karie Davis-Nozemack. "Tax avoidance as a sustainability problem." Journal
of Business Ethics (2016): 1-17.
Dowding, K. and Lewis, C., 2012. Newspaper reporting and changing perceptions of ministerial
accountability in Australia. Australian Journal of Politics & History, 58(2), pp.236-250.
Dwyer, T., 2010. The taxation of shared family incomes. About this issue, p.23.
Mafrolla, E. and D'Amico, E., 2016. Tax aggressiveness in family firms and the non-linear
entrenchment effect. Journal of family business strategy, 7(3), pp.178-184.
Prebble, R. and Prebble, J., 2010. Does the use of general anti-avoidance rules to combat tax
avoidance breach principles of the rule of law-a comparative study. Louis ULJ, 55, p.21.
Richardson, G., Taylor, G., and Lanis, R., 2015. The impact of financial distress on corporate tax
avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling,
44, pp.44-53.
Richardson, G., Taylor, G., and Lanis, R., 2015. The impact of financial distress on corporate tax
avoidance spanning the global financial crisis: Evidence from Australia. Economic Modelling,
44, pp.44-53.
Taylor, G. and Richardson, G., 2013. The determinants of thinly capitalized tax avoidance
structures: Evidence from Australian firms. Journal of International Accounting, Auditing, and
Taxation, 22(1), pp.12-25.
Woellner, R.H., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., 2010. Australian taxation
law. CCH Australia.
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RUNNING HEADER: Applied business research
Xynas, L., 2010. Tax planning, avoidance, and evasion in Australia 1970-2010: the regulatory
responses and taxpayer compliance. Revenue Law Journal, 20(2010), p.38.
Xynas, L., 2011. Tax Planning, Avoidance and Evasion in Australia 1970-2010: The Regulatory
Responses and Taxpayer Compliance. Revenue Law Journal, 20(1), p.2.
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