Partner’s Opinion – Jon Jarman
Now that we have clarity around the shape of the new government, we’ve been looking ahead at any important tax changes that may be enacted in the next three years. Some of these have been confirmed following the coalition negotiations, such as the changes to personal income tax brackets and the reversal of the previous government’s restrictions on interest deductions for residential property investment. The detail of these changes are yet to be confirmed by the Inland Revenue Department (IRD), but the change in tax brackets will be increased from the 1st of July 2024, while the interest deductibility allowances will most likely step back up to 100% between the 2024 and 2026 tax years. While the timing is not yet confirmed, they have also indicated the Brightline period for residential property investment will reduce from ten years to two.
One potentially significant change that has yet to be confirmed is around an increase to 39% for the Trustee tax rate, which was initially proposed by the previous government. The National Party had indicated that it supported this increase, and since the election have not made any comment on halting this process, even when discussing other tax changes it has planned.
The current Trustee tax rate of 33% has been in place since 1989 and was deliberately aligned with the top personal tax rate at that time. But in 2020, a new top tax rate of 39% for personal income over $180,000 was introduced, and since that time some taxpayers have achieved a 6% tax saving by accumulating income within a Trust, rather than distributing the income to individual beneficiaries who are on the 39% tax rate.
If an increase in the Trustee tax rate to 39% was to occur, then there would be an additional incentive to distribute income from the Trust to beneficiaries whose personal tax rates are lower than 39%. It is important to keep in mind that this could create risk for the Trust if these income allocations resulted in significant debts being owed by the Trust to beneficiaries in their personal names which may then be open to relationship property or creditor claims, or make the beneficiaries a deemed Settlor of the Trust. If the Trust was to allocate income to the beneficiary who then gifted the subsequent debt, the IRD would likely view this as an artificial mechanism designed to avoid tax.
Where there are companies with shares owned by a Trust, there may be benefit in declaring dividends prior to any change, as this would lock-in the current 33% tax rate on any dividend income received by the Trust. If the Trustee tax rate change is to go ahead, the expectation is that the current 5% Withholding Tax payable on dividends would increase to 11% (the difference between the 28% Company tax rate and the 39% top tax rate).
As always happens following an election, there is a lot of assumption and guesswork among the industry on these topics at the moment, but the key point to note is that we’re constantly looking ahead to see where things might go. We’ll keep you up to date with any changes when they are confirmed, and are always happy to discuss what the future may bring for you and your business.
