International student column

  • Author : David Russell QC
  • Date : June 2010
ABOUT THE AUTHOR: David Russell QC is a Barrister at Wentworth Chambers

Given the common ancestry of trusts and estate practice throughout the common law world, it might be expected that there would be little variation in the day-to-day operation of trusts and estates and practitioners’ responsibilities in relation to them. The Australian experience suggests otherwise.

The differences arise in large part from the revenue considerations applicable. But other variations arise from Australia’s federal system of government.

With the exception of superannuation and public collective investment vehicles, which are extensively regulated by national laws, the applicable law in relation to a trust or estate issue is generally to be found in the law of the State (6) or Territory (2) which applied to the trust or estate. These vary quite extensively: one State, for example, has abolished the modern rule against perpetuities absolutely, whilst the other jurisdictions retain it in modified formats, in most cases closely modelled on the 80 year rule. In one State there is no equivalent of the Variation of Trusts Act, whilst in the others quite extensive (but not identical) powers are conferred upon the local State or Territory Supreme Court to exercise the jurisdiction.

The national regulatory models applicable to public collective investment vehicles and superannuation funds, with the primary regulatory function being undertaken respectively by the Australian Securities and Investments Commission and the Australian Prudential Regulatory Authority (large funds) and the Australian Taxation Office (small funds) are quite prescriptive, so that increasingly the answers to particular questions are likely to be found in this statutory overlay rather than in the general law of trusts.

But the major causes of difference are to be found in the egalitarian nature of Australian society and its taxation laws.

As to the former, English notions of primogeniture associated with a hereditary peerage, and the tying up of estates in succession to limit the capacity of improvident heirs to damage a family’s long term future, are not extensively shared in Australia. Nor, despite the existence of some very large personal fortunes, are huge estates (and particularly landed estates) common.

As to the latter, Australia has had no death taxes of any sort since the early 1980s, and even in the capital gains tax (CGT) context, death will not normally be a taxable event, so there is no need for trusts to be utilised to ameliorate them.

The prime driver for the popularity of trusts comes from the fact that, although there are some complications at the margins, trusts whose income (including taxable capital gains) are enjoyed by the beneficiaries during the income year or held indefeasibly for them at the end of it, are fiscally transparent, despite the legislation’s egregious reference to them as ‘entities.’ This, coupled with the effective exemption of 50 per cent of capital gains from tax in the hands of individuals, makes trusts a much more tax effective structure for holding assets likely to increase in value than companies, where the exemption is not enjoyed at either corporate or shareholder level.

Another contributing factor, particularly in the 1980s, was the availability of sliding tax scales for infant beneficiaries (and an exemption of the first AUD6,000 of income from tax), so that a family small business could obtain a significant tax free income. So the trust is often a first choice for a family business enterprise.

Yet another distinction is to be found in Australia’s version of the grantor trust principle: it applies only to the actual settlor (even of a nominal amount) and not to those who subsequently contribute to the fund (often in much larger amounts).

Of more interest to the fiscally innovative was the absence of restraints on transferability of loss trusts until comparatively recently, whereas inhibitions of varying degrees of effectiveness in relation to corporate losses have been with us since the 1940s.

All of this often leads non-Australians to express surprise at the way in which trusts are used in that country. But it makes for very interesting practice, and Australian Courts are having to pioneer issues which have not arisen in other jurisdictions (particularly in the context of insolvency). Australia’s fortunate early recovery from the global financial crisis (indeed, Australia did not even enter into recession) provides a great background from which to exercise that (albeit at comparatively high taxation rates).


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