Chartered Accountants Australia and New Zealand (CA ANZ) is pleased to see the Government welcoming the Finance and Expenditure Select Committee (FEC)’s recommendation that it pulls back from implementing a blanket 39 per cent trust tax rate, saying it recognises that trusts are created for a variety of reasons and not just to avoid paying the top tax rate.

The committee recommended a two-tier tax rate structure for trusts, in line with CA ANZ’s own proposal, but with a much lower ‘de minimis,’ of $10,000, where trusts with income over that figure would be taxed at 39%.

When CA ANZ made its oral submission in late January 2024, it released data from Inland Revenue which showed moving from a 33% to 39% tax rate would result in 89% of trusts being overtaxed. John Cuthbertson FCA, NZ Tax Leader for CA ANZ, told the committee the new tax rate would have a disproportionate effect on thousands of small trusts, when in fact it was aimed at just 11% of trusts which earned 81% of total trust income.

“The recommendation is great news for trusts which generate relatively small amounts of income and were not set up to avoid tax.”

“CA ANZ had recommended a $100,000 threshold for fairer taxation of trusts, but overall, we’re pleased that the committee has listened to all the submitters who supported the concept of a two-tier regime,” Cuthbertson says.

Cuthbertson continues, “A $50,000 de minimis would have covered 74 per cent of trusts and would better “right-size” the alignment of tax rates – but the current $10,000 level will at least prevent over-taxation of 45 per cent of trusts.”

This means if the trust’s total net income (after expenses) is $10,000 or less, the current 33% trust tax rate will continue to apply. For trusts with net income above the threshold, the new 39% tax rate will apply to all income (not only income exceeding the threshold).

The committee has also recommended simplifying and expanding the proposals relating to estates and trusts settled for disabled people:

• The administration period for deceased estates to qualify for a lower tax rate has been extended from 12 months to 3 years. In a further change the estate income will now be taxed at a flat 33% rate in the income year of death and the subsequent 3 years, instead of giving trustees the choice to elect to apply the deceased person’s personal tax rate for income derived within 12 months of the person’s death.
• The definition of a disabled beneficiary has been broadened to also include a person who receives Jobseeker support on the ground of a health condition, injury, or disability; a person who receives the disability allowance; and a person aged 65 or older, and who met the definition of disabled beneficiary in the income year they turned 65, or the year prior. Disabled beneficiary trusts can also have multiple disabled beneficiaries. A trust that meets the “disabled beneficiary trust” criteria will be taxed at a flat rate of 33% (instead of at the beneficiaries’ personal tax rates, as originally proposed).

In addition, the committee has recommended a carveout from the 39% trustee tax rate change for energy consumer trusts and legacy superannuation funds.

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill has been reported back by the FEC, with a number of other recommendations. The Bill was introduced by the previous Labour Government in May 2023 and reinstated by the Coalition Government following last year’s election.