Trust Tax Rate Increase
Back in May 2023, the Labour government announced that the tax rate for Trusts would increase to 39% from 1 April 2024. At the time the top personal tax rate was increased to 39% back in 2021, the government signalled that if they found signs that Trusts were being used to avoid the higher tax rate, then they would take action. The new government has said they will continue with this tax increase and are unlikely to reduce trust tax rates within their first term.
Since April 2022, IRD has been collecting additional information about Trusts in the annual tax returns. It would
not be unreasonable to assume that this additional information might be used to inform further changes in Trust taxation rules in the future.
What does this mean?
From 1 April 2024 all income received and retained by the Trustees will be taxed at a flat rate of 39%. There are a few exceptions:
- A 12-month exemption from the 39% tax rate for deceased estates. During the 12-month 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 person’s personal tax rate
What should I do?
New Zealanders have certainly had a love affair with Trusts although a number of Trusts were wound up when the new Trust Act 2019 come into force in January 2021. It would seem IRD consider that the only reason someone would set up a trust is to avoid tax, which is certainly not the case.
For many years Trusts have been used to create, grow and safeguard family wealth. And while tax might factor into the equation, it is rarely the primary motivator.
In our view, there are two reasons why you might wish to set up a Trust:
- .To safeguard personal assets from business or relationship risks
- Running a business comes with personal risk to the owner, and one of the best ways of safeguarding the family home and savings for retirement is to hold them in a Trust for the benefit of the wider family
- A trust can also be useful where one partner brings a significantly greater level of wealth into a new relationship, although there are other ways to achieve this outcome
- .As an investment vehicle to hold intergenerational wealth
- Unfortunately most of us will not create so much wealth that it will be passed down to more than one generation, so only a very few people will fall in this category
The recent changes to trust law and taxation, and the expectation that there could well be more changes in the future might be enough to review whether a trust is still relevant to you.
How can I minimise the impact?
For many business owners, the company shares are often held by a Trust. Any dividends declared by the company and paid to the
Trust before 31 March 2024 will be taxed at the old trust rate of 33%.
Company dividends are paid out with tax credits attached, so you may wish to consider whether tax liabilities due for payment in April or May 2024 should be paid slightly earlier in March 2024. This will mean that a higher dividend could be declared before the end of the financial year.
The new tax rate is only applicable to income retained by the Trustees. So any income allocated to beneficiaries will be taxed
at the beneficiary personal tax rate, which might be less than 39%
We would be cautious about allocating income to beneficiaries where the Trust does not also intend to pay the cash-out to the
beneficiaries. While it might result in a lower tax bill overall, if the overall goal of the Trustees is to protect and grow
wealth it might end up being a short-sighted decision
- The tax increase will not have any impact on the PIE tax regime, and the highest tax rate for a PIE investment will remain at 28%. Most banks offer PIE deposits, and there are also equity exchange-traded funds (ETF’s) that are PIE’s
How we can help?
We have a great working knowledge of Trusts and can help you decide whether a Trust really is a good option for your current circumstances. If needed, we can work with you on winding up your Trust.
If you’re running a business, you’re ideally using Xero and able to produce reliable financial reports. If you’re not confident about the accuracy of your internal reports, we can undertake a quick review and bring them up to date.
We can use those reports to work out how much of a dividend you could declare prior to 31 March 2024 and complete all the necessary documentation.
We can also look ahead at your future tax bill and provide advice on whether you should bring forward you tax payments to before 31 March 2024.