- Rate alignment
- A de-minimis rule with 2-tiered tax rate
While welcoming proposals to more fairly tax backdated lump sum payments and provide tax rollover relief for businesses impacted by the North Island weather events, CA ANZ believes that alignment of the trustee tax rate to 39% should be rightsized to mitigate over taxation. CA ANZ preference would be to introduce a de-minimis income threshold with a 2-tier tax rate structure, complimented with limited targeted exemptions.
Appropriate rate alignment?
The Government wishes to align the trustee tax rate with the top personal tax rate. A taxation lens is being applied with the assumption that trusts are formed or used to circumvent the top personal tax rate of 39% by retaining income in a trust as trustee income.
In reality trusts are established for a variety of reasons including intergenerational wealth preservation and transfer, asset protection, estate planning, continuity of business, privacy and confidentiality, charitable giving and providing for those who cannot provide for themselves.
There is a general presumption that over taxation at the trustee level can be mitigated by way of income allocation to beneficiaries. However, in CA ANZ’s view this presumption is flawed as it is not always possible or appropriate to distribute income to beneficiaries, including within short term time frames.
The Regulatory Impact Statement Taxation (RIS), issued in May, acknowledges an increase in the trustee tax rate to 39% will result in over taxation where distributions of tax-paid trustee income to lower-rate beneficiaries are taxed above the beneficiaries’ marginal tax rates.
CA ANZ recommends deferring the proposed 1 April 2024 application date , in order to allow a thorough analysis of the data collected under the new trust disclosure regime and sufficient time to develop appropriate rules. Information provided to date suggests that only a small number of trusts derived income over $180,000 which is the threshold for the top individual marginal tax rate of 39%. However, the level of income derived by this small subset may be potentially significant.
To mitigate over-taxation, CA ANZ recommends other options be considered, including imposing the 39% rate only on trustee income over $180,000, a de minimis rule and extending the imputation regime.
A de-minimis rule with 2-tiered tax rate preferred
If the proposals proceed, a de-minimis rule with a 2 tier tax rate structure should be introduced. A trustee tax rate of 33% should be retained for trusts with trustee income (before any allocations) of $100,000 or such other threshold amount that is considered appropriate. Absent publicly available data, Inland Revenue will presently be best placed to confirm an appropriate de-minimis income threshold.
A 2-tier system should be preferred from the perspective of design efficiency and outcomes to the provision of multiple disparate exemptions. The need to provide specific exemptions is substantively reduced if taxation overreach is broadly countered with a simple 2-tier system.
To alleviate concerns that multiple trusts could be formed to take advantage of the de-minimis rule, an aggregation rule could be introduced. Given the time and resources required and on-going administration costs, we query how common it would be for multiple trusts to be formed to circumvent the 39% rate. The split of existing large trusts should be obvious in any event, enabling follow-up action if required.
Further exemptions will still be required
While a 2-tier system based on income thresholds is a good start, it won’t address all situations where a reduced 33% rate is appropriate. This will particularly be the case for widely held trusts with communal asset ownership where distributions are not possible or appropriate given the trusts purpose. Widely held trusts will often have significant income and accordingly a de-minimis will not be effective.
Widely held trusts such as energy consumer trusts should be exempt from the proposals. With these trusts it is not possible for a person on the top tax rate to treat the trust as an investment vehicle, because the trust property is pre-determined, and the beneficiaries are identified by class.
Not all trusts used by Māori for communal ownership purposes are eligible to be taxed as a Māori authority. Furthermore, there are some trusts used by Māori who because of the compliance burden, choose not to be a Māori authority.
Thought should also be given to whether it is appropriate to differentiate the tax treatment for trading activities by virtue of the structure used. Trading trusts currently tolerate a 5% differential to their corporate entity equivalents. Should they be required to restructure and for what purpose? It is hard to see the mischief being countered in this context.
Trading trusts often hold significant assets and will retain income in the trust to maintain the assets and expand the business.
Corporate securitisations may involve a unit trust which will be taxed at the company tax rate. Where it is not a unit trust it is not sensible to tax the vehicle at 39% as it would result in overreach.
Taxing trusts with benevolent purposes, including education trusts, at 39% will result in a reduction in philanthropy and result in overreach because the beneficiaries are generally not on the 39% tax rate.
CA ANZ also submitted on the proposed anti-avoidance measure to tax close company beneficiary income as trustee income, the adequacy of the timeframe allowed for an estate administration and the limitations placed on a trust to qualify as a disabled beneficiary trust.