MEDIA RELEASE (NZ)

New data from Inland Revenue has revealed that incoming legislation to tax all trusts at the top 39% tax rate will result in 89% of all trusts being overtaxed.

Appearing at the Parliamentary Finance and Expenditure Committee (FEC) this morning, Chartered Accountants Australia and New Zealand (CA ANZ) Tax Leader John Cuthbertson FCA spoke to new information obtained through an Official Information Request, and the disproportionate effect on thousands of small trusts.

“Inland Revenue’s own data shows that of the trusts required to make disclosures, 83% had taxable income below $100,000, and 89% below $180,000 in the 2022 tax year. Further, 23% of trusts had taxable income below $1,000 in that period,” said Cuthbertson.

“The proposed 39% rate is aimed at the 11% of trusts that earned 81% of the income, and in most cases that’s entirely fair. But it’s a sledgehammer that will have significant collateral damage. Based on Inland Revenue’s numbers, the remaining 89% of trusts will be overtaxed.”

In August last year, CA ANZ proposed a two tier tax structure, where the top tier of trusts would still be taxed at the 39% rate, but where trusts under a certain value would pay the original 33% rate. With the true numbers now available, Mr Cuthbertson detailed the peak accounting body’s proposal to address the over taxation.

“Our proposal for a two-tier tax structure with a $100,000 tax cliff is pragmatic, and is more likely to be acceptable to Government, given a reduced fiscal cost. Trusts under that threshold would be taxed at 33%. Trusts with taxable income over $100,000 would have the whole amount taxed at the top 39% rate.”

“The benefits of this approach is that it mitigates taxation overreach for 83% of trusts, reduces the need for multiple exemptions, provides certainty and simplicity and minimises compliance costs – all key components of good tax design.”

Notably, the proposal features a tax cliff, where every dollar of income is subject to tax at the higher rate if the threshold is breached. This differs from a marginal rate structure, as found in New Zealand’s income tax brackets, where only the additional income above the threshold is taxed at a higher rate. Implementing a tax cliff at $100,000 would help alleviate concerns about gamesmanship, such as the potential for multiple trusts to be formed to take advance of the proposal, as the costs to set up and administer multiple trusts would outweigh the benefits.

CA ANZ had previously raised concerns about the impact of the Trust Disclosures regime, which Inland Revenue had estimated would cost each trust somewhere between $500 and $2,000 to comply with.

“It should be understood that trusts are formed for a variety of reasons including asset protection, business continuity and succession, privacy and confidentiality, providing for the welfare of beneficiaries, charitable giving and intergenerational wealth transfer.”

“The two-tier proposal would still enable the top tier of trusts to be taxed at 39%, while allowing for targeted exclusions to reduce this rate where appropriate.”

Previous CA ANZ releases on trust disclosures:

3/2/22: Small trusts in the crosshairs of new disclosure rules
1/6/23: We’ve seen the High Wealth data – now show us the Trust Disclosure data
11/8/23 Two-tier system needed to address over-taxing of trusts