The Government is proposing to align the trustee tax rate with the top personal tax rate of 39% for the 2024–25 and later income years (beginning 1 April 2024 for most trusts).
The current trustee tax rate of 33% has been in place since 1989, when it was aligned with the top personal tax rate at that time. When the new top tax rate of 39% for personal income over $180,000 was introduced in 2020, the trustee tax rate was not adjusted at that time.
According to IRD, aligning the trustee and top personal tax rates at 39% will help ensure that trusts cannot be used to pay less than the top personal tax rate.
Who will be affected by the trustee tax rate increase?
The Government says that “only a small proportion of trusts will pay most of the additional tax.” In practice, this means that the top 5% of trusts will bear the brunt of the change.
That said, it’s all relative. If you have a Trust that earns income that cannot be distributed elsewhere, under this proposal your Trust will pay tax at the 39% rate.
Some trusts are exempt. For instance, the 33% tax rate remains in place for deceased estates and disabled beneficiary trusts provided certain criteria are met. And Family Trusts that have no income would not be impacted under this proposal.
What we anticipate, as we have seen with other recent legislative changes, there is the potential for additional compliance costs and unintended consequences for everyone.
About income in Trusts
Income earned by a trust can be paid or allocated to the beneficiaries of the trust as “beneficiary income”, or it can be retained by the trustees and taxed as “trustee income”. Beneficiary income is taxed at the personal tax rates of the recipient beneficiary which, if personal income, is taxed at an increasing tax rate as income rises. Trust income is taxed at a flat tax rate, which is currently 33% and proposed to rise to 39%. This means that the same tax rate applies from the first dollar of income derived.
Will I need to make changes to my trust?
It is important to keep in mind that the devil is always in the detail. That detail will come in the form of the usual suite of bills that see these proposals enacted. This is typically not a fast process and while we await the detail, it’s important not to make any knee-jerk uninformed decisions.
Whether you hold your assets in your personal name, in a company or in a Trust, each of these have risks and benefits that need to be carefully considered and weighed up both for the ‘now’ and for the future.
If the company tax rate remains at a flat 28%, it could be tempting to consider a company for asset ownership. However, we encourage you to seek advice as moving assets into a company may have other implications that outweigh the surface benefits of a lower tax rate.
Further, there may be changes you can make to improve your arrangements and avoid paying unnecessary tax. For instance, if your trust’s beneficiaries pay tax at a lower rate, the trust can distribute income to them. This allows the funds to be taxed at the beneficiary’s personal tax rate. If this isn’t possible, the trust may be able to credit income to a beneficiary’s current account or establish a sub-trust for the beneficiary.
Pathfinder Solutions can help you
Over the coming months, Pathfinder Solutions asset structuring experts will be following the proposal, bill and pending legislation so that we are well informed to help you with any information and/or decisions you want or need to make as a result of these proposed changes.
Ensuring your affairs are set up in the most tax-efficient and risk-efficient way can be tricky, but we’re here to help. Our team is well-versed in trust matters; we can answer your questions, advise you on the implications of the new tax rate, and look at tax mitigation strategies.
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