The Australia Institute says too many people are using trust funds to minimise their taxable income.

The think tank’s new report by senior research fellow David Richardson shows that, according to ATO data, the equivalent of 21.6 per cent of Australia’s national income was run through a trust – depriving the tax office of roughly $3.5 billion a year.

The review found that Australians with taxable incomes of over $500,000 contribute the most to the trust pool, which is now worth around $3.1 trillion.

“These are staggering figures I think,” Mr Richardson said.

“We estimate that, under fairly conservative assumptions, taxpayers would be avoiding at least 1 per cent of trust revenue through the trust vehicles.”

The Australia Institute says key advice from the Henry Review - updating and rewriting the rules around trusts - had been largely ignored.

The most common method trustees use to reduce their taxable income is ‘income splitting’, where money is put into a trust and then re-distributed as income.

“You may put all of the income into the hands of your children, for example, and there are no rules about that,” Mr Richardson said.

“All the income has to be accounted for, but you can stream them in whichever way you like.”

The full report is accessible here.