Description of this module
Proposed Trustee Tax Increase
The proposed increase in the income tax rate for trusts from 33% to 39% may make a trust less attractive from a tax persepctive, but there are still other benefits.
In the New Zealand Government’s 2023 budget, a new income tax rate of 39% was announced for trusts to take effect from 1 April 2024:
“[The Government is] improving the integrity of our tax system, by bringing the trustee tax rate in line with the top personal tax bracket [of 39%]”.
On 1 April 2021, the Government introduced a new tax bracket of 39% for all personal income made over and above $180,000. The previous highest tax bracket prior to this was 33% for all personal income over and above $70,000 and all trustee income. At the time the Government proposed the new tax bracket, it received advice from Inland Revenue that the trustee tax rate should also be increased from 33% to 39%, however that rate increase was not implemented at the time.
As a result, for the past 3 years since the introduction of the new top tax bracket, it has been possible for individuals earning over $180,000 to utilise the lower trust tax rate. Consequently, that individual would pay 33% personal income tax on its income up to $180,000 and the trust that receives the “excess” would also only pay 33% on the trust’s income.
According to Inland Revenue, following the change in the top individual tax rate in 2021, there was an almost 50% spike in income subject to the trustee rate from $11.4 billion in the 2020 tax year to $17.1 billion in the 2021 tax year.
This proposed trustee tax rate increase means that individuals will no longer be able to avoid paying 39% tax on income earned over and above $180,000 simply by using a trust and will need to consider other forms of acceptable tax planning.
New Tax Rate:
The new tax rate for trusts is proposed to align with the top individual tax rate, to improve the fairness of the tax system, and to reduce the opportunity for high income taxpayers to circumvent the top personal tax rate.
The proposed increased income tax rate for trusts may make the use of a trust for tax planning purposes less popular, however a trust may still be a useful asset planning structure.
If you would like to discuss the formation of a trust or your current trust requirements, please contact Mason or Josh to arrange a trust review.