Trusts should not be set up for the sole purpose of gaining taxation savings (to do so invites the Inland Revenue Department to invoke anti-avoidance provisions). Tax savings may arise out of setting the trust up but it should not be the primary reason for the creation of the trust. Some examples of the primary reasons for creating a trust are:
The current proposal by the Government to tax distributions of beneficiary's income to minors at 33 per cent seems to suggest that the Government considers a number of trusts set up over the last 10 or so years have been set up primarily for income splitting purposes. The main advantage of income splitting is a reduced taxation liability.
As indicated by the discussion paper issued by the Government "Income splitting can occur within a family unit when taxpayers allocate income to other members of the family who face lower marginal tax rates, in order to achieve tax savings. This may involve a person transferring income-producing assets to a trust. The income arising from that asset is then distributed as beneficiary income to minors who are on a low marginal tax rate. This income is often, in substance, not income of the children."
Even though the Government has attempted to answer everyone’s concerns within the discussion paper (including the exception rules and the definition of a minor) the following points still need to be raised:
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