Partner’s Opinion – Julie: The New Trust Tax Rate
In the recent Budget 2023 announcement the government announced an increase in the Trustee tax rate from 33% to 39%, effective from 1 April 2024. This change aligns the Trustee tax rate to the recently introduced new top personal tax of 39% (on income over $180,000). A change like this has been somewhat expected following the recent research done by the Inland Revenue Department (IRD) to understand how Trusts are being utilised in New Zealand and is intended to remove the tax incentive that currently exists for people to hold assets in Trust.
At first glance the change in Trustee tax rate may be seen as big blow to Trustees who hold income earnings assets in a Trust. However, it’s important to note that trustees are still able to distribute pre-tax income to beneficiaries. This allows that income to be taxed at the beneficiaries’ personal marginal tax rates, and therefore may significantly reduce the amount of income that is exposed to the new Trustee rate.
The intent of this change was to make the tax system simpler. However, in making this change they have created another distortion when it comes to income from Portfolio Investment Entities (PIE’s). PIE income has tax deducted by the portfolio manager at 28%, and this is treated as a final tax (i.e., no further tax is payable). Under the current rate there is a 5% benefit when investing in PIE funds compared to standard investments. This incentive will increase to 11% with the new Trustee tax rate. I would note, however, that this seems to be on the IRD radar to change in the near future, so I expect any benefit will be short-lived.
In addition to this, it’s worth noting that concessions to these new rules are being developed for Trusts established to benefit disabled persons, and Trusts resulting from deceased estates.
As I mentioned, at first glance the new rules appear to hit hard but with due care the impact can be mitigated. If you have a Trust and are worried about its impact on you, please contact your Leech & Partners team member for a chat.
