As you may be aware – The government said that the budget for 2023 included no major tax changes. However, New Zealand residents who possess a family trust will now be staring down the barrel of a flat tax rate of 39% for income received. This is a 6% hike from the existing rates of 33% from 1st April, 2024. How this could possibly be worded as not major for the the approximately 400,000 trusts officially registered in New Zealand is incomprehensible.
If the new trust rate does come into effect, large dividends are likely to be declared to extract retained earnings from companies owned by trusts, at a rate of 33%, sheltering them from having to pay the 39% rate on these earnings in the future. A similar trend was seen prior to when the 39% personal marginal rate came into effect. The fiscal year ending 31st March 2024 will be the last period a dividend could be distributed prior to this change coming into effect.
Some taxpayers will question whether this change disqualifies trusts as a viable structuring option beyond 31/3/2024. However, the reality is that the asset protection and succession planning advantages still exist, irrespective of the tax treatment.
This development follows significant changes to the trust laws around disclosure requirements, which have already proven to be a major challenge for trustees while submitting their tax returns for the 2021/22 fiscal year. The rationale for this change is supported by a statement in the Budget Press Release, which reads: “Ministers had made it clear that if analysis demonstrated that higher-income individuals were avoiding the established rate by making more extensive use of trusts, the Government would take steps to address this concern. Fresh data from Inland Revenue indicates an almost 50% surge in income subject to the trustee rate, rising from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.”
The Budget Press Release endeavours to suggest that this alteration won’t significantly impact the majority of trusts, asserting that “a small proportion of trusts will pay most of the additional tax. The top five percent of trusts with some taxable income in the 2021 tax year accounted for 78 percent of all trustee income ($13.3 billion out of $17.1 billion). This is estimated to raise approximately $350 million per year.”
However, the fact that the majority of trusts will not bear the brunt of this tax doesn’t provide much solace to the considerable number of trusts owned by ordinary New Zealanders with a marginal tax rate of 33% or lower. We expect taxpayers will be inclined to make large distributions to beneficiaries over 18 years of age with lower marginal tax rates. Such actions could lead to undesirable side effects such as a claim against the trust by a beneficiary who has received the distribution from the trust as a loan in their favour rather than cash. Furthermore there may be hesitance from trustees, as routine distributions might not align with the provisions of trust deeds.
The alteration to the trustee tax rate is incorporated into legislation presented on Budget Day and will be subjected to review and consultation through the Select Committee process.
Between now and the new rate coming into effect, there is still the outcome of the general election to be decided – so nothing is certain at this stage. To date there appears to be little or no response on this issue from any of the political parties aside from the incumbents. If you’ve seen something to the contrary – please let us know!