And just what is a trust — the vehicle with which Senator Warwick Parer has distanced himself (as Minister for Resources) and the ownership of shares which otherwise would be an obvious conflict of interest.
Trusts have been used in Anglo-Saxon law for centuries for a wide range of purposes, but always to avoid something nasty, like taxes, duties, the folly of youth, nosiness and costly administrative and legal farnarkling.
A trust is a legal arrangement, usually set down in a deed or a will. It comprises property, a trustee, beneficiaries and a duty on the part of the trustee to act for the benefit of the beneficiaries not himself.
The trustee (which may be a person or a company) appears for all intents and purposes to legal own the property. His name is on the share certificates, on the title deeds and on the registration papers.
So the property, for legal purposes, is sitting in the trustee’s name, and only the trustee has the legal power to collect the income or transfer the property. But if the trustee fails to do so for the benefit of the beneficiaries the beneficiaries can get the courts to dissolve the trust and order the trust to account for the property.
The essential point is that the trust can shuffle the property and income about within the trust without incurring all the nasties that usually go with the transfer of property and the earning of income: duties, tax, administrative costs and the like.
Of course, the vehicle is available only to the propertied classes, and it must be substantial property to make all the setting up costs worthwhile. It is not available to mug PAYE income-earners.
In the 16th and 17th centuries trusts were first used to get around a nasty little principle of law call the rule against perpetuities. This rule prevented people from tying up their property after they died down the generations by leaving people mere life estates or income only from the property. The rule said you could tie up your property for a life (of someone now living) plus 21 years, after which it had to become fully owned. So you could leave only the income of your property to your wife and to your last born until he turns 21, but after that he has to get his hands on the property as his own even if he is a ne’er do well.
(Trust lawyers, please forgive my sacrifice of accuracy for simplicity.)
Enter the trust. Plonk all the property in a trust and you can tie up the property for an extra generation or more.
Moreover, the trust can be put in the hands of a sober and sensible trustee who will distribute income only for prudent things, like education, whereas if the beneficiary gets his hands on all the property at once he will squander it on whores and gin palaces.
As a side effect, it was seen that trusts did not require the property to go through probate between generations (and often avoided a lot of death duties).
Among families (including several living generations and many cousins) the trust is an excellent vehicle. The trustee legally owns the all the property. So the use of the property and the income from it can be shuffled about among the beneficiaries without incurring stamp duty (in the cases of houses and shares).
Of greater import is the question of income tax. As a general rule, the trust can accumulate income sometimes without paying any income tax, and certainly not at the rate of mug PAYE taxpayers or companies. It only becomes taxable in the hands of the beneficiaries when it is paid out to them.
So a family might put property in a trust. Usually it is husband’s property. The trust property earns income. After a while, it pays out some of the income to beneficiaries, usually the children at school-fee time or the wife at new-car time. Without a trust the husband would earn the money directly from the property and have to pay 48 per cent tax on it (because he is earning a lot of money at his usual job). He would then pay the school fees or buy the car. With a trust, the children or the wife get paid the trust income directly and pay only tiny amounts of tax on it because they are in a low tax bracket.
With a big family, the benefits increase. The trustee can distribute at his discretion. It means that whomever has a low income that year in the family can get income and pay less tax than if the trust property were held as an individual by the head of the family. A family member out of work, having a baby etc can get income from the trust and the family pays less tax than if there were no trust.
Usually, the head of the family is either the trustee himself or is in a position to virtually direct the trustee.
Overall, all beneficiaries benefit (including those who get not payments for many years) in both tax reductions and in income being accumulated for later years when their income from other sources falls, even if one or other beneficiaries do not get a payout for many years. It is nonsense for Senator Parer to claim no conflict on the ground the shares are in trust.
And, on the tax front, trusts should be treated like companies and individuals. They should pay tax as they earn, and pay it at the full company rate.