Capital Pty Ltd, an Australian resident company, is the trustee of the Marx Family Trust. The shareholders in Capital Pty Ltd are Karl and his wife Jenny who are both sui juris resident natural persons.

The Marx Family Trust is a discretionary trust. The objects of the trustees discretion are: Karl (whose income is zero) Jenny (a top marginal rate taxpayer) Groucho (Karl and Jennys son who is a sui juris non-resident) Chico (Karl and Jennys son who is a resident minor) Harpo (Karl and Jennys son who is a resident person of unsound mind)

In the year ending 30 June 2021 the income of the trust estate was $100,000 and the net income of the trust estate was $80,000. In the year of income ending 30 June 2022 the income of the trust estate was $80,000 and the net income of the trust estate was $100,000.

In both years the income of the trust estate and the net income of the trust estate were derived solely from the provision of services. In respect of both years advise the trustee as to how distributions should be made so as to produce the minimum Australian tax burden for the Marx family as a whole.

Tax policy question The major alternatives for structuring closely held businesses in Australia are:

(a) a company limited by shares;

(b) a general law partnership;

(c) a limited partnership;

(d) a unit trust; and

(e) a discretionary trust.

Discuss whether some of these forms more desirable from a tax viewpoint than others if the objective of the business is to maximize after tax returns to its Australian owners. If you conclude that this is the case discuss whether it is desirable having regard to identified tax policy objectives.