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Trustee tax rate to increase to 39%

Budget 2023

The many New Zealanders who have a family trust may be unhappy to learn that Budget 2023 has announced an increase in the trustee tax rate from 33% to 39% with effect from 1 April 2024. For a Budget which was badged as having ‘no major tax changes’, this may feel like a major change for the 400,000 trusts registered in New Zealand.

This move follows the introduction of significant disclosure requirements, which trustees will have recently grappled with in filing 2021/22 tax returns. Support for the change comes in the following comment in the Budget Press Release: “Ministers made clear (sic) then that if analysis indicated high income earners were circumventing the rate through greater use of trusts, the Government would move to address this issue. New information from Inland Revenue has shown an almost 50 percent spike in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.”

Given this statistic pre-dates the trust disclosure data which has just been collected, it’s not clear what the real purpose of the disclosure rules was as the decision to increase the trustee rate hasn’t been based on that data. The increase in income in 2021 is hardly a surprise as a natural and expected reaction to the increase in the personal tax, and something Inland Revenue has indicated they didn’t have a concern with.

The Budget Press Release attempts to suggest that this change won’t materially impact most trusts, with the comment “[o]nly a small proportion of trusts will pay most of the additional tax. The top five percent of trusts with some taxable income in the 2021 tax year accounted for 78 percent of all trustee income ($13.3 billion out of $17.1 billion). This is estimated to raise approximately $350 million per year.”

The fact that the majority of trusts will not be paying the majority of the tax will be of little comfort to the significant number of trusts held by ‘regular New Zealanders’ with a marginal tax rate of 33% or lower.

While the Budget Press Release states “[t]rusts with lower-rate beneficiaries can continue to use existing rules to mitigate over-taxation”, all this means is that a trust will need to distribute its annual income to beneficiaries in order to access a lower tax rate, this is something many trustees will be reluctant to do as regular distributions may be inconsistent with trust deeds. Some minor exemptions from the rule are proposed for deceased estates and trusts for disabled persons.

The change to the trustee tax rate is included in legislation tabled on Budget Day and will be subject to consultation through the Select Committee process.

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