19 May 2023
NZ Budget 2023.
From Koller & Hassall’s point of view, the most notable item from yesterday’s budget announcements was the increase in the Income Tax rate for Trusts.
Trusts currently pay tax at a flat 33%. From April 2024 (ie the 2025 tax year) this rate increases to 39%.
The increase will align the Trust tax rate with the 39% top tax rate for individuals. For individuals, this rate is applicable for income earned over $180,000. The increase in Trust tax rate is described as “improving the fairness of the tax system and reducing opportunities for high-income taxpayers to circumvent the top personal tax rate.” (Press release 18 May 2023 Hon David Parker)
Some of Koller & Hassall’s high-income earning clients have previously chosen to leave income in a Trust to be taxed at 33% instead of allocating the income to themselves and paying tax at 39%. This was always going to be the obvious consequence of the 2021 increase of the top individual tax rate to 39%.
We do not think that any of our clients have set up Trusts for the purpose of paying less tax. Overwhelmingly our clients have set up Trusts for the purpose of mitigating risk (particularly business risk) and protecting their family assets. Usually, this also includes the desire that those assets be retained for the benefit of their children. For these clients, the increase in the Trust tax rate will be unexpected and unpleasant news.
Of course, Trustees will continue to be able to allocate Trust income to beneficiaries, so that that income will be taxed in the beneficiary’s tax returns at their marginal tax rate. We expect that for the 2025 tax year, most Trust clients will be looking to allocate all their income to beneficiaries. We will work with our clients to help determine the best allocation of the income to minimise the family’s taxes.
An exemption is expected for deceased estates to allow trustee income to be taxed as though it is the income of the deceased person. But we have yet to see the detail about how that will work.
If you have any questions about the increased Trust tax rate and how it might affect you and your family, then please contact us for more personalised advice.