Taxing times for trusts

Posted by Ethical Investing NZ

Tuesday 16 April 2024

Income in a trust that’s not distributed to beneficiaries is taxed at what’s called the “trustee rate” – in effect, the trust.  Investors with family trusts will know that for some years there’s been a discrepancy between the top rate that beneficiaries pay (39%) and the tax rate for trusts (33%). The last government proposed raising the tax rate for trustees from 33% to 39% as from 1 April this year, to match the top personal tax rate. This was to discourage tax avoidance. The bill went to Parliament but lapsed following the change of government.

Interestingly, the current government re-introduced the bill – albeit with a couple of tweaks. The prime minister said last year that, while he does not support the trustee rate increase, the reality was that the Government couldn’t afford to leave the trustee rate at 33% given the Government’s fiscal position.

He did say that when the fiscal position improves, the government will look to reduce both the trustee rate and the top marginal tax rate, however this would not be in the Government’s first term. The intention is for the trustee rate and the top marginal tax rate to be the same to discourage tax avoidance and protect the integrity of New Zealand’s tax system.

The “tweaks” are:

  • Trusts with no more than $10,000 of trustee income per year will continue to be taxed at 33% rather than the increased rate of 39%.  Trusts who have more than $10,000 of trustee income will be taxed at 39% from the first dollar of trustee income derived.
  • The trustee tax rate will also be kept at 33% for estates, but only in the year of death and the following three income years, and for a couple of other specialised types of trusts.

The Government has estimated that introduction of the $10,000 threshold will mean that only around 49,000 of the 400,000 trusts in New Zealand will be affected by the new rules.

Regardless of whether the top rate is 33% or 39%, beneficiaries and trustees have even more reason to consider using Portfolio Investment Entities (PIEs). They have a top tax rate of 28%, and no tax on most NZ & Australian shares, thus making them tax-effective for many investors. With many new PIEs having been launched in the past year, in part a response to the impending tax changes, it’s now possible to build a diversified ethical portfolio built entirely on PIEs.

We are proud to have recently launched an all-PIE Sustainable portfolio series which will benefit many investors. If you would like to know more, please reach out.

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