Trust tax rate increases to 39%

From the 2024/25 income year (1 April 2024 for most trusts), the tax rate applying to trustee income has increased from 33% to 39% to align with the top personal tax rate.

There are only a few concessions to the rate change:

• trusts with no more than $10,000 of net trustee income per year will continue to be taxed at a flat rate of 33%
• estates in the year of death and for the following three income years will have a flat tax rate of 33%, following that the 39% rate will apply
• disabled beneficiary trusts, energy consumer trusts and legacy superannuation funds will all have a flat tax rate of 33%

Given the tax rate increase, trustees have been concerned that some ordinary actions taken by trustees may be considered to be tax avoidance. Inland Revenue has now released guidance confirming that the following actions are unlikely to be regarded as tax avoidance, so long as there are no artificial or contrived features:

1. A company, that is owned by a trust, changes its dividend paying policy. Changes might include paying retained earnings prior to the increased trustee tax rate coming into effect and/ or reducing dividends following the increase in the trustee tax rate
2. A trust distributes income to a beneficiary so that that income is taxed to the beneficiary’s (lower) tax rate rather than the increased trustee tax rate
3. A trust incorporates a company and transfers its income-earning assets to the company such that the income is now taxed at the 28% company tax rate instead of the trustee tax rate of 39%
4. A trust is wound up
5. A trustee chooses to invest in a portfolio investment entity (PIE) as these are taxed at a maximum of 28% rather than other investments which would be subject to tax at the trustee tax rate of 39%

Inland Revenue have, however, noted that questions may be asked if:

1. A trust allocates income to a beneficiary that is taxed at a lower rate, but under the arrangement, the beneficiary resettles the same amount back onto to the trust, such that the beneficiary is not in reality benefiting from the distribution
2. A trust allocates income to a beneficiary that is taxed at a lower rate, but the recipient beneficiary has no knowledge of the allocation or no expectation of receiving the income, which may indicate again that the recipient beneficiary is not really benefiting from the distribution
3. A trust replaces dividend income with loans in an artificial manner such that the loans do not reflect the reality of the arrangement. The Commissioner has specifically noted that it will consider the following factors to analyse the reality of a loan: the term of the loan, the interest and repayment terms, the history of payments made on the loan, and the commercial reality of the borrower making loan repayments
4. A trust artificially alters the timing of (bringing forward or deferring) any taxable or deductible payment, particularly where it is linked to existing contractual terms or practice for the date for payment
5. A trust creates or increases income or expenditure that does not reflect the reality of the structure or arrangement (e.g. interest, dividends or management fees or other similar transactions between related parties)

Talk to our experts

If you would like to discuss how the trust tax rate increase will impact your trust,  please contact your Nexia advisor.

If you are not already a Nexia client and you are looking for specialist tax advice or strategies for effective tax planning, contact us to explore how we can help. Nexia is one of New Zealand’s best accounting and business advisory firms with offices in Christchurch, Albany and Newmarket in Auckland, and Hastings in the Hawke’s Bay.