Hiking the tax rate charged on trusts could cause unintended consequences for middle-income New Zealanders with family trusts, tax experts warn.
The Government expects to collect an extra $350 million a year in personal income tax from high-income New Zealanders by increasing the trustee tax rate from 33 per cent to 39 per cent.
“The change will help ensure that the top marginal tax rate applies more comprehensively to individuals with income over $180,000,” Finance Minister Grant Robertson said of the changes announced in yesterday’s Budget.
“This approach was recommended by officials when the top income tax rate was increased. Ministers undertook to monitor the situation and we are now acting.”
However, tax experts foresee issues for some people with lower incomes who happen to have an income-earning asset held in a family trust.
Deloitte NZ tax partner Robyn Walker said there were 400,000 trusts registered in New Zealand, which have just been through the added compliance costs associated with significant new disclosure rules.
And now some untargeted individuals may be caught in the crossfire of the bigger tax rate.
“A lot of mums and dads will have a house or a rental property in a family trust and you might have a bank account that’s earning a little bit of interest or your rental income going through there. And that will all now be taxed at 39 per cent when the marginal tax rate of those individuals might be 33 per cent or less.
“The whole point of the trust disclosure rules was really to gather evidence about how trusts were being used and you’d think by now there would be insights in terms of how much they are being used by the ‘super rich’ versus ordinary people just doing ordinary things just because New Zealand has developed this obsession with having a family trust.”
Now, she said, unless the income was distributed to a beneficiary, it would be taxed at the trustee rate of 39 per cent.
“The thing is the beneficiaries might be children, or could be a whole range of beneficiaries. And the trust deed will quite possibly certify that you can’t make distributions or you can only make certain distributions.”
Walker notes that the official Budget press release suggests the change won’t materially impact most trusts. However, she says the fact that only a small number of trusts will pay the majority of the tax “will be of little comfort to the significant number of trusts held by ‘regular New Zealanders’ with a marginal tax rate of 33 per cent or lower”.
Chartered Accountants ANZ NZ country head Peter Vial said the Budget announcement was a surprise and should be debated widely.
“Whether this is a ‘major tax change’ is a moot point.
“The $5.7 billion spike in income taxed at the 33 per cent trustee rate in the first year of the 39 per cent top marginal tax rate is all the evidence that the Government needed to respond.”
“It is a relief to hear that the trustee rate change will be subject to full select committee scrutiny. This should allow the opportunity for any unexpected consequences and issues to be addressed.
“Not addressing other distortions in the tax system confirms that this Government, like others before it, has put broader issues with the tax system in the too-hard basket.”
BDO tax partner Alan Scott said some middle-income New Zealanders could get caught and have to look at how their trusts were organised.
Some businesses also run income through trusts and the tax change could be problematic for those who were already paying tax at the company level.
Income subject to the trustee rate leapt from $11.4b in the 2020 tax year to $17.1b in the 2021 year, indicating tax minimisation through the use of trusts was an immediate response from taxpayers.
“Only a small proportion of trusts will pay most of the additional tax,” Revenue Minister David Parker said. “The top 5 per cent of trusts with some taxable income in the 2021 year accounted for 78 per cent of all trustee income ($13.3b out of $17.1b).”
Also proposed are targeted measures to prevent over-taxation of trusts in certain situations, including deceased estates and trusts for disabled people, and will allow trustee income of an eligible trust to be taxed as though it is the income of the deceased person or the disabled beneficiary.