Increase in Trustee Tax Rate to 39%

UPDATE 29 Feb 2023:

The government is considering exempting certain trusts from paying the new 39% tax rate due to come into effect on 1 April 2024. Finance Minister, Nicola Williams, announced that the Bill is being modified to explore the possibility of "carve-outs" and a "de minimis rate" for some trusts. This could involve applying the 39% tax rate to higher-income earning trusts and leaving lower-earning trusts on the current 33% rate.

We will advise on any further updates as they arise. Please contact us to discuss

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Budget 2023 announced that from 1st April 2024, the trustee tax rate is going to increase from 33% to 39%. This change will affect all those who have family trusts registered in New Zealand.

Inland Revenue has since the release of the change released guidance around how it may perceive some taxpayer transactions and structural changes:

1. A company is owned by a trust and changes its dividend paying policy:
   Inland Revenue is fine with companies adjusting their dividend payouts to owners based on changes in tax rates or the owners' needs, seeing this as legitimate, not tax avoidance. However, concerns arise if a company claims to pay dividends without actually having the funds to do so, especially in a scenario where the company might have to be dissolved.

2. A trustee distributes income to a beneficiary so it is taxed to the beneficiary rather than at the trustee tax rate (resulting in less tax payable):
   Allocation of trust income to beneficiaries with lower tax rates is viewed as legitimate and not typically tax avoidance if it aligns with the trust deed, trust law, and tax law, despite being influenced by tax considerations. Concerns of tax avoidance could arise if, despite seeming legal compliance, the beneficiary is not genuinely entitled to or will not benefit from the income distribution.

3. A trustee adopts a company structure and transfers its income-earning assets to the company:
   Inland Revenue does not consider using a holding company for income-earning assets as tax avoidance, unless there are artificial arrangements involved. But, they might get suspicious if a company is just put in the middle to save on taxes, like between a trust and a business, or to hide someone's personal earnings.

4. A trustee chooses to wind up the trust:
   Winding up a trust is unlikely, without more (such as artificial or contrived features), to be tax avoidance.

5. A trustee chooses to invest in a portfolio investment entity (PIE):
   Choosing to invest in a company over other options like bonds or term deposits, according to Scenario 3 of QB 23/01, is generally not seen as tax avoidance by Inland Revenue, unless the investment involves fake or manipulated elements.

If you have questions about this new change, please get in touch with our team!

Source: IRD Article, GA 24/01