The long-anticipated Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Act 2024 received Royal assent on Friday 29th March 2024, and came into effect on the 1st April 2024, which saw increases to the Trustee tax rate.

When the top personal tax rate was increased to 39% in 2020, it was only a matter of time until the 33% tax rate within trusts would come under scrutiny. The obvious concern was that income would be diverted into a trust and taxed at the lower 33% trustees tax rate instead of the 39% personal tax rate. 

Inland Revenue figures estimate that there are over 400,000 trusts in New Zealand, though around 10% (43,000) of those trusts have a nil income. Whilst initially the change to a 39% tax rate for trustees was expected to apply to all trusts, an amendment to the Bill has now included a de minimis threshold for trusts with income up to and including $10,000. Trust’s with income of less than $10,000 will continue to be taxed at 33%. Whilst that threshold is lower than many tax commentators wanted (particularly as if you exceed the $10,000 threshold you are taxed at the higher rate from the first dollar of trustee income derived), it should nonetheless remove most small family trusts from the higher rate. The Inland Revenue are estimating that only 49,000 of the 400,000 trusts would now be impacted.  

In addition, there are also other trusts that will remain at the 33% such as disabled beneficiary trusts.

So, what can you do to minimise the impact of the changes if your trust is affected? The first port of call should always be to obtain tax advice from your accountant. The Inland Revenue has, however, provided guidance on changes that they would be unlikely to consider to be tax avoidance.

One such example relates to the allocation of income. As the 39% tax rate only applies to income retained by the trust as trustee income, the most straightforward change available is to allocate income to a beneficiary who has a lower personal tax rate than 39%. If those funds are not immediately needed, the beneficiary can have them credited to their current account and held there until called upon. However the beneficiary should have notice of the allocation and it is important to note that once allocated, the decision cannot be changed, and the beneficiary has an absolute right to withdraw the funds. That allocation must, of course, also be in accordance with the terms of the Trust Deed.

Winding up the Trust could be another option, though trustees should weigh up the cost of the additional tax burden (along with other administration costs) with the overall purpose and benefits having the trust in the first place, whilst also considering any other tax implications such as bright-line (which itself is expected to change in July 2024) when winding up a trust containing property assets.

If you are concerned about the tax rate change or wish to discuss your trust generally, the Pier Law Trusts Team are here to assist you.