New Zealand’s Family Trusts Face Tax Hike in Budget 2023
Introduction:
The recent Budget 2023 announcement of an increase in the trustee tax rate from 33% to 39% starting from 1st April 2024 has raised concerns among the many New Zealanders who have a family trust.
There are approximately 400,000 family trusts registered in the country and although Budget Press Release attempts to downplay the impact on most trusts, emphasizing that only a small proportion of trusts will bear the brunt of the additional tax burden, this development could impact any trusts that derive an income.
The Trustee Tax Increase:
The decision to raise the trustee tax rate was driven by the Government’s efforts to address concerns about high-income earners using trusts to circumvent tax obligations. The increase in the trustee tax rate to 39% aligns the top personal income rate to the trust rate, removing an incentive to keep income in the trust when an individual’s personal income exceeds $180k p.a.
According to the data, the top five percent of trusts with taxable income in the 2021 tax year accounted for 78% of all trustee income, raising approximately $350 million per year. Unfortunately, this reassurance offers little comfort to the significant number of trusts owned by ‘regular New Zealanders’ with a marginal tax rate of 33% or lower.
Original IRD guidance issued at the time suggested trustees could distribute annual income to beneficiaries to access lower tax rates who could then resettle these funds back to the trust. However, this guidance has subsequently been withdrawn, as it may contravene rules around tax evasion.
The proposed minor exemptions for deceased estates and trusts for disabled persons may provide some relief, but it remains to be seen how effective they will be.
Conclusion:
If passed into law, the increase in the trustee tax rate has significant implications for trustees managing family trusts in New Zealand. We will update you if, and when this becomes law.
