Is an investment trust the devil incarnate?

OPINION: I wondered when Trusts would reappear as the topic of the day; I thought it would be because everyone wanted one, much like in the nineties when they were flavour of the month.

Instead they are the devil incarnate, following the uproar over Government benefits being paid out to the "poor" who have sheltered their wealth under the guise of a family trust.

Now let's get a few things straight:

* Trusts have been around for many hundreds of years; basically since medieval times; it is true that they were designed to avoid the taxes of the day; and it is ironic that they are at the centre of tax controversy today.

* The tax advantage of trusts comes from the difference between the top marginal rate of tax for individuals, i.e. 38 percent, and the trust rate, 33 percent, or the beneficiary rate (as low as 12.5 percent). The Government largely stopped income splitting by introducing the kiddy tax, effectively removing the tax advantage of giving trust income to children under 16.

* One of the main uses of trusts is asset protection; i.e. assets are transferred to a trust to protect them from creditors.

* Income on these assets accrues to the Trust not to the settlor; and I guess that's the problem.

* Generally and very simplistically speaking, to get assets into a trust you have to "give" them away. This means that the assets are not yours anymore.

The point is, trusts are created for many purposes; they are well ensconced in the law and history, and shouldn't be banished because of the abuse of a few.

Morality is a funny thing; the law is the law, and legal arrangements that fall within the law often give tax advantages. To many, a working for families tax credit is just a negative tax; i.e. it reduces other taxes already paid. 

If the Government didn't intend that, then it should change the law re  benefits (something that is always going to cause problems) but don't undo the tax concept; and undermine a thousand years of legal thinking.

I don't believe it's appropriate to remove trusts from the legal landscape; if the Government is that worried about them, it should align the tax rates for companies, individuals and trusts at 30/30/30.

There is no perfect tax system, as we will find when the recommendations come out from the tax task force later this year.

And with no such perfect system, we will always have games around the edges.

Remember, no one ever said you were compelled to pay the maximum amount of tax possible.

Adam Davy is Managing Partner of BDO in Wellington