Lewis Carroll and the trust rewrite saga

The Walrus and the Carpenter
Walked on a mile or so,
And then they rested on a rock
Conveniently low:
And all the little Oysters stood
And waited in a row.

"The time has come," the Walrus said,
"To talk of many things:
Of shoes — and ships — and sealing-wax —
Of cabbages — and kings —
And why the sea is boiling hot —
And whether pigs have wings."

"But wait a bit," the Oysters cried,
"Before we have our chat;
For some of us are out of breath,
And all of us are fat!"
"No hurry!" said the Carpenter.
They thanked him much for that.

Lewis Carroll, Through the looking-glass

The Lewis Carroll narrative bespeaks the trust re-write saga. The oysters are us, standing, waiting in a row, a little tired by our efforts so far but highly expectant of the rewards of simplification (but suspecting that they will be made a meal of — refer to the last verse of The walrus and the carpenter). The walrus is Treasury. I'll leave it to your imagination who takes on the role of the carpenter. It is funny how fantasy so often matches reality. As Alice later observed:

"I like the Walrus best," said Alice, "because you
see he was a little sorry for the poor oysters."

"He ate more than the Carpenter, though," said
Tweedledee. "You see he held his handkerchief
in front, so that the Carpenter couldn't count how
many he took: contrariwise."

"That was mean!" Alice said indignantly. "Then I
like the Carpenter best — if he didn't eat so many
as the Walrus."

"But he ate as many as he could get," said

This was a puzzler. After a pause, Alice began,
"Well! They were both very unpleasant
characters —"

I do not mean for a moment that Treasury is an unpleasant character or houses unpleasant characters but, rather, that the alternatives put forward in the trust re-write are certainly unpleasant. No simplification here so far. A policy paper is to be issued in September but I would not hold out too much hope of true simplification.

The time has come to talk of an alternative small business structure as the simple approach we all hope for. What should such an entity look like and how should it function?

Ideally, it would exhibit a combination of the present merits of a discretionary trust and company. Let's call it a "discretionary company".

The discretionary company would be able to distribute to any person or entity within a family group in much the same way as a discretionary trust. It would be taxed on retained earnings. In an ideal world, the rate would be the corporate rate (30% and "going down"); however, the reality is likely to be a rate somewhere between 30% and the maximum marginal rate (46.5%). (Reality is informed by the fact that surplus income is, in practice, taxed at the corporate rate now and which is effectively increased by the tax paid on Div 7A structured loan interest).

Concessionally taxed income of the discretionary company could flow to shareholders and there would be no profits first rule. This would all take place within the confines of a family group.

Unfortunately, Div 7A would still have some, but modest, operation because of the rate differential. However, it could be vastly simplified.

Is this desirable and, moreover, is it achievable?

The answer lies in further consultation and analysis. A fulsome discussion is a necessary precursor to the simple solution we all seek. And, hopefully, there is no need for avian pigs to assist.

Ken Schurgott

Ken Schurgott is President of the National Council at The Tax Institute.

The Tax Institute is Australia's leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.


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