If you have a family trust in New Zealand, recent news might have caught your attention. The trustee tax rate is set to increase from 33% to 39% starting from the 2024/25 tax year, which generally begins on April 1, 2024. This may come as a surprise to the 400,000 registered trusts in the country, especially since it comes under a budget that was supposed to have ‘no major tax changes’.
For those who utilise trusts for asset protection, which is common among small business owners in New Zealand, this change could have substantial implications.
The proposed changes
The trustee tax rate increase is a part of the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. Along with this rate increase, the Bill introduces three additional changes related to trusts:
- A 12-month exemption from the 39% rate for deceased estates. During this period, the estate will be taxed at the personal tax rate of the deceased person.
- Trusts settled for the care of a disabled person will be taxed at the disabled beneficiary’s personal tax rate.
- Income received by certain close company beneficiaries of trusts will not be taxed as beneficiary income in the company but will be treated as trustee income with tax paid at the higher trustee rate. This aims to prevent trusts from distributing income to closely connected companies to take advantage of the lower 28% tax rate instead of the 39% trustee rate.
The trustee tax rate increase follows the prior increase of the top personal tax rate to 39% from April 1, 2021. At the same time, significant trust disclosure requirements were introduced, adding more complexity to the tax landscape.
Following the gathering of information and reviewing the behaviour of taxpayers over the intervening time, the Government justifies this trust rate increase with the argument that high-income earners might be utilising trusts to circumvent taxation at higher rates.
The Government maintains that only a small percentage of trusts will shoulder the bulk of this tax increase. According to the Budget Press Release, the top five percent of trusts accounted for 78% of all trustee income in the 2021 tax year, estimated at $13.3 billion out of $17.1 billion, and the increase is projected to generate approximately $350 million in tax revenue annually.
However, this explanation might offer little comfort to the numerous trusts held by regular New Zealanders who personally pay tax at 33% or a lower marginal tax rate.
Data from Inland Revenue indicates that there are around 120,000 trusts with trustee income ranging from $1 to $180,000. The average trustee income for these trusts in 2021 was $21,000.
For these trusts, the tax increase to 39% could translate to an average increase in tax payable per trust of $1,260, which collectively could amount to a significant $151.2 million extra tax burden, all things being equal. This has led to calls for a two-tier tax rate for trusts, where those with income under a certain level (such as $180,000) would only pay tax at the current 33% rate.
A word of caution
Trustees that are considering what impact this proposed change will have on them and their beneficiaries would be wise not to make any immediate decisions regarding changes in the distribution of income or reorganisation of investment structures. Not only do we not know the final version of any changes, as the consultation process may impact this, but it is possible that the changes might not proceed at all as any new Government will need to reinstate the draft legislation (or not) following the election.
Aside from the impact of any tax rate change, before making any changes trustees should consider their responsibilities to the beneficiaries of the trust under trust law as well as whether any restructuring or changes in distribution policy could be considered tax avoidance. As we saw following the increase in the personal tax rate in 2021, any change in taxpayer behaviour in light of tax rate changes is likely to attract Inland Revenue attention so trustees are advised to seek both professional legal and tax advice before proceeding with material changes.
