The data available on the trustee tax rate change suggests it will result in significant over-taxation for most New Zealand trusts, says Chartered Accountants Australia and New Zealand, as it proposes a two-tier system address issues from the proposed trust rate alignment with the 39% top personal tax bracket.

“The data shows that 66% of trusts had median income of just $5,000 to $6,000, which if derived by an individual would be taxed at a much lower rate of 10.5%.  To have them paying at not just the old 33% rate, but the new 39% rate, is simply taxation over-reach,” said CA ANZ NZ Tax Leader John Cuthbertson FCA. 

“The policy makers have applied 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. This assumption must be challenged.”

“The majority of trusts are established for reasons including asset protection, estate planning, intergenerational wealth preservation and transfer, or providing for those who cannot provide for themselves.”

“There is also a flawed assumption that over-taxation at the trustee level can be solved by allocating the income to beneficiaries. This runs counter to the reasons why most people establish trusts. It is not always possible or appropriate to distribute income to beneficiaries, including within short term time frames.”

“Taxing all trusts at a flat rate of 39% is clearly inappropriate. CA ANZ preference, if the proposed rate increase proceeds, would be to introduce a minimum income threshold with a 2-tier tax rate structure, complimented with limited targeted exemptions.

“A rate of 33% should be retained for trusts with trustee income, before allocations, of up to a threshold such as $100,000, with the 39% rate only applying to trusts with income above the de minimis threshold. Until the trust data collected to date is made publicly available, Inland Revenue will be best placed to establish the appropriate threshold.”

“CA ANZ’s recommendation is that the current plans are deferred from 1 April 2024, to enable thorough analysis of the data collected under the new trust disclosure regime. Information to date suggests that only a small number of trusts derived income over $180,000, but that the amount of income derived may be significant. We really need to see that data, which has been painstakingly provided, to make informed decisions.”

“What we are proposing – a two-tier tax rate structure – provides a simple solution to take the heat out of the problem. It reduces the need for a number of complex exemptions with boundary challenges.”

“An aggregation rule could take care of those trying to set up multiple trusts. Given the time, resources, and on-going administration costs, we don’t think it would be that common for multiple trusts to be formed to try and circumvent the 39% rate. Splitting up large trusts would be obvious and trigger follow up action from Inland Revenue.”

“Targeted exemptions will still be required to enable use of a reduced 33% rate where appropriate. A prime example would be widely held trusts with communal asset ownership where distributions are not possible or appropriate given the trusts purpose. These trusts will often have significant income and accordingly a de-minimis will not be effective.”

“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.”

“There’s also a range of perverse outcomes that need to be addressed here. For example, taxing trusts with benevolent purposes, including education trusts, at 39% will result in a reduction in funds available for philanthropy and result in overreach because the beneficiaries are generally not on the 39% tax rate.”

“The Government clearly used a very blunt measurement as justification to lift the Trustee tax rate from 33% to 39%, being the $5.7 billion spike in trustee income in the 2021 income year. However, what is not clear, is the amount of non-taxable distributions from that spike in trustee income, to beneficiaries with a marginal tax rate of 39%.”

“There is a strong correlation between that spike and companies paying out retained earnings to shareholders as a one-off dividend distribution ahead of the increase in the personal tax rate to 39%. Trusts are but one form of shareholder.”

“Unfortunately, if we don’t right size this tax change, we’re going to negatively affect a large number of trusts and related communities.”