New rate will overtax 89% of trusts 

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New data from Inland Revenue has revealed that incoming legislation to tax all trusts at the top 39% tax rate will result in 89% of all trusts being overtaxed.

Appearing at the Parliamentary Finance and Expenditure Committee (FEC) this morning, Chartered Accountants Australia and New Zealand (CA ANZ) Tax Leader John Cuthbertson FCA spoke to new information obtained through an Official Information Request, the disproportionate effect on thousands of small trusts, and CA ANZ’s proposed solution.

“The proposed 39% rate is aimed at the 11% of trusts that earned 81% of the income, and in most cases that’s entirely fair. But it’s a sledgehammer that will have significant collateral damage. Based on Inland Revenue’s numbers, the remaining 89% of trusts will be overtaxed.”

“Our proposal for a two-tier tax structure with a $100,000 tax cliff is pragmatic, and is more likely to be acceptable to Government, given a reduced fiscal cost. Trusts under that threshold would be taxed at 33%. Trusts with taxable income over $100,000 would have the whole amount taxed at the top 39% rate.”

“The benefit of this approach is that it mitigates taxation overreach for 83% of trusts, reduces the need for multiple exemptions, provides certainty and simplicity and minimises compliance costs – all key components of good tax design.”

Notably, the proposal features a tax cliff, where every dollar of income is subject to tax at the higher rate if the threshold is breached. This differs from a marginal rate structure, where only the additional income above the threshold is taxed at a higher rate.

Implementing a tax cliff at $100,000 would help alleviate concerns about gamesmanship, such as the potential for multiple trusts to be formed to take advance of the proposal, as the costs to set up and administer multiple trusts would outweigh the benefits.

“It should be understood that trusts are formed for a variety of reasons including asset protection, business continuity and succession, privacy and confidentiality, providing for the welfare of beneficiaries, charitable giving and intergenerational wealth transfer.”

“The two-tier proposal would still enable the top tier of trusts to be taxed at 39%, while allowing for targeted exclusions to reduce this rate where appropriate.”

Related: Trust issues: implications of a 39% trustee tax rate

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