The rules around taxing Trusts are changing on 1 April 2024, with the Government proposing to change the trustee income tax rate from 33% to 39%.
The Government’s intention behind this change is to align the trustee tax rate with the top personal income tax rate of 39%.
Will this affect my Trust?
This change will only impact Trusts that earn income. If a Trust has no income, then there is no income to tax. The majority of Trusts in New Zealand do not earn income (eg: many Trusts only own a passive asset, such as a house).
It is estimated there are approximately 400,000 Trusts in New Zealand. The IRD estimates that approximately 177,000 of those Trusts earn income. The Government estimates that approximately 49,000 of those income-earning Trusts will be impacted by this change.
When a Trust earns income, that income can either be:
- Allocated or paid out to the beneficiaries as “beneficiary income”; or
- Retained in the Trust and taxed as “trustee income.”
Where Trusts allocate income to beneficiaries, that beneficiary income is taxed at the marginal tax rates of that beneficiary. There are rules around making distributions to minor beneficiaries under the minor beneficiary rule, which are important to be aware of.
For Trusts earning significant income, if it is decided that the Trust income is to be retained and not allocated to a beneficiary, it will be taxed at 39%, rather than 33%, from 1 April 2024 onwards. Once the tax is paid, it is paid – Eg: if the Trustees pay tax on the Trust income, there will be no further tax to pay when that income is distributed to the beneficiaries.
Are there any exceptions?
As of the date of this article, the proposed exceptions to this trustee tax rate change are:
- Low Income Trusts – Trusts with less than $10,000 of income.
- Deceased Estates – Estates will have an exemption from the 39% tax rate for approximately 3 years.
- Disabled person Trusts – When a Trust is created for the benefit of a disabled person, the tax rate applicable to the Trust will be based on the personal tax rate of the beneficiary instead of the Trust’s tax rate. However, it is important to note that there are strict criteria that must be met for a Trust to qualify as one settled for a disabled person.
- Energy consumer trusts – eg: TECT, EnTrust etc
If your Trust falls into one of the above categories, it will continue to be taxed at 33%.
Should I still have a Trust?
There have been a lot of changes in the Trust Law and tax space over the past five years. As a result, trustees must keep keep on top of these changes. It is also timely for Trustees to consider the relevance of the Trust.
If you are a trustee of a Trust, you should regularly consider:
- What were the intentions when establishing the Trust?
- Do these original intentions still exist?
- Is the Trust still fit to achieve the above intentions?
For general queries or more information, please contact our Trust Team. For tax advice, we recommend you consult your Trust accountant.