The change is to the rate of tax on “trustee income”. A trust is not an entity as such, but rather a legal relationship where there is a split between beneficial and legal ownership. As the trustees are the owners of the assets, legally speaking, they are the ones that earn any income. For tax purposes, a trust is more akin to an entity as it usually has its own IRD number and files separate tax returns. In a trust situation, the tax rules allow that income (or a portion of it) to be allocated to the beneficiaries (“beneficiary income”); or otherwise it is taxed in the trust (“trustee income”).

The 39% rate is set to apply from 1 April 2024. It will apply to all trustee income, not just amounts over $180,000. In this sense, the rate change is more an increase than an “alignment” because it will apply to trustee income that would be under the top personal tax threshold if earned by the beneficiaries personally.

In a trust setting it may not be appropriate or always possible to distribute to beneficiaries to address tax overreach. Based on information available to date, it appears that most trusts derive taxable income less than the $180,000 threshold applicable to individual taxpayers on the top marginal tax rate.

There are a couple of exceptions to the 39% rate. The first is where the trust is an estate. When we talk about estates, we are talking about the period after someone dies, before the assets are distributed to their heirs under either a will or under the Administration Act. Legally, an estate may not be a trust, but for tax purposes we treat it as one. The proposal is to treat the income as being earned by the deceased and taxed at their marginal rates for a twelve month period following their death. After the twelve month period, any income from the estate assets would be taxed at the trustee rate.

The second exception is where the trust qualifies as a “disabled beneficiary trust”. To qualify for the exception, the trust must have only one main beneficiary (although it may have additional residual beneficiaries). The beneficiary must have a reduced income due to a disability. In the draft legislation the criteria is that the beneficiary is receiving the supported living payment or if the beneficiary is a minor, the caregivers are receiving the child disability allowance.

Why has the rate change been signalled? This is not entirely clear. Inland Revenue has recently started collecting additional financial information on trusts as part of the tax return process, following a law change in 2021. The first of these enhanced returns related to the period ended 31 March 2022 and were filed during the year ended 31 March 2023. It is not clear whether Government has analysed this additional information or made changes solely on the back of its High wealth Individuals project findings. It had not published any trust disclosure reporting analysis before making this change, so it is unclear whether the additional information has raised any unexpected surprises.

These proposals were not consulted on prior to introduction however they will now be subject to full public consultation through the Select Committee process. CA ANZ intends to submit on them and welcomes any comments from members.