Mum and Dad trusts bear the brunt of NZ trust tax rate hike

This article was current at the time of publication.

Some 400,000 New Zealand trusts and their advisors are left pondering their next step following the announcement in Budget 2023 that the trustee tax rate will lift from 33 per cent to 39 per cent, effective for most trusts, from 1 April 2024.

For Andrew Dickeson FCPA, Taxation Services Director at Baker Tilly Staples Rodway, the immediate question following the announcement of the hike is what should be done between now and 1 April next year.

Dickeson thinks a “tsunami” of taxable payments to trusts at the outgoing 33 per cent rate is possible.

Company and PIE rates

Of course, accountants and their clients will also be eyeing the differential between a top trustee rate of 39 per cent and the company and portfolio investment entity (PIE) rates, which remain at 28 per cent. 

However, Dickeson points out that the Inland Revenue Department (IRD) has already moved to forestall one obvious arbitrage opportunity.

In a commentary on the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill released on the day of the budget, the IRD details on page 69 the circumstances under which, “to buttress the 39 per cent trustee tax rate … income derived by corporate beneficiaries is treated as trustee income for the purposes of determining the rate of tax that applies”.

“If people think they can get around the issue by just creating a company and channelling beneficiary income into it, that won’t work,” Dickeson declares.

He says if one thing is certain, it’s that there will be further “tweaks” to regulations around trusts, companies and potentially even PIEs.

In a post-budget article, professional services firm Deloitte emphasises to taxpayers considering changing investment structures to be fully aware of the following IRD comment:

“Ministers have decided to progress increasing the trustee tax rate to 39 per cent for the 2024-25 and latest income years while considering PIE and company/shareholder misalignment issues on a longer timeframe.”

Right intention, wrong method

From a tax policy perspective, CPA Australia New Zealand Divisional Council President Angus Ogilvie FCPA says aligning the trustee rate with the top personal income tax rate is “absolutely the right thing to do”. 

However, he seriously questions the process by which the New Zealand Government arrived at the decision.

Ogilvie recalls that last year the IRD tried to crack down on the issue of taxpayers channelling income through corporate structures to “arbitrage” the difference between the company tax rate and higher personal income tax rates and proposed a Dividend Integrity and Personal Services Attribution regime.

CPA Australia – along with other industry bodies – strongly opposed the measures.

“That one went back to the drawing board and there’s been no announcement since,” Ogilvie says. “It’s a very difficult area.”

Who’s affected?

Ogilvie believes the issues around misaligned tax rates have again shown the government bypasses –at its peril – the generic tax policy process of a regulatory impact analysis, consultation on proposed rules and careful consideration of submissions.

“New Zealand once trumpeted a ‘low rate, broad base’ tax system,” he continues. “This move is a clear signal that we are moving away from that, which should concern all taxpayers. 

“High net worth individuals will take [professional] advice to avoid the worst impacts of these changes. Mum and Dad trustees may not be able to and will bear the main cost of the tax change”.

Dickeson believes the government’s budget line is “a bit of a beat-up”. “They’re making out trusts are all about HWIs (high net worth individuals) making money.”

The budget media release announcing the trustee tax rate hike argues only a small proportion of trusts will pay most of the additional tax. 

“The top 5 per cent of trusts with some taxable income in the 2021 tax year accounted for 78 per cent of all trustee income ($13.3 billion out of $17.1 billion),” the release claims.

“In fact, thousands of New Zealanders with income-producing assets [in trusts] aren’t on the 39 per cent [income] tax rate,” Dickeson counters.

He also takes issue with the IRD’s line that trustees can just pass all the income down so that it’s taxed at the beneficiary’s marginal rate.

“The main point of having a trust is to hold income in and accumulate wealth – so that would defeat the purpose of a lot of trusts,” he argues.

Ogilvie agrees, stating: “Only around 5 per cent of New Zealanders earn over $180,000. By increasing the trust tax rate to 39 per cent, there is a significant risk of over-taxation.

“The bill proposes allocating income to beneficiaries at their individual tax rates to mitigate this, but it ignores the realities of how most New Zealanders operate trusts. Most want to retain income in the trust, not distribute it.”

According to Dickeson, there’s a case to allow trusts $180,000 of income before the 39 per cent tax rate kicks in – or to just tax trusts at the same income tax bracket thresholds as an individual.

The budget media release also draws attention to “new information” from the IRD showing income subject to the trustee rate “spiked” from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.