What do the latest changes mean for small business owners with trusts in New Zealand?

Starting from the 2024/25 income year (1 April 2024), the tax rate for trustee income has increased from 33% to 39% to match the top personal tax rate.

Key points and guidance related to this change:

Concessions:

Small Trusts:

Trusts with up to $10,000 of net trustee income per year will still be taxed at 33%.

Estates:

Estates will be taxed at 33% for the year of death and the following three years, then at 39%.

Special Trusts:

Disabled beneficiary trusts, energy consumer trusts, and legacy superannuation funds remain at a 33% tax rate.

Trustee Actions and Tax Avoidance:

To avoid being seen as engaging in tax avoidance, trustees can consider these actions, which are unlikely to be regarded as tax avoidance:

Dividend Policy Changes:

A company owned by a trust can change its dividend-paying policy, such as paying out retained earnings before the new tax rate applies or reducing dividends afterward.

Income Distribution:

Distributing trust income to beneficiaries, who are taxed at lower rates than the trustee rate.

Company Incorporation:

Transferring income-earning assets to a newly formed company, which is taxed at 28%.

Winding Up a Trust:

Ending the trust’s operations.

Investing in PIEs:

Investing in Portfolio Investment Entities (PIEs), which are taxed at a maximum rate of 28%.

Inland Revenue’s Stance:

The Inland Revenue has flagged certain actions that might raise questions:

Beneficiary Resettlement:

Allocating income to a lower-taxed beneficiary who then resettles the same amount back to the trust.

Unaware Beneficiaries:

Allocating income to a beneficiary who is unaware or not expecting it.

Artificial Loans:

Replacing dividend income with loans that don’t reflect the true nature of the arrangement.

Timing Alterations:

Changing the timing of payments (advancing or deferring) to manipulate tax outcomes.

Unrealistic Income/Expenditure:

Creating or increasing income/expenditure that doesn’t reflect reality, such as with interest, dividends, or fees between related parties.

Small business owners should review their trust structures and consider these guidelines to ensure compliance and avoid potential issues with Inland Revenue.