An Easter reprieve? What trustee tax changes mean for New Zealanders

Because of its hasty passage, the new tax legislation does not come with any official guidance. Photo / Getty Images

OPINION

Parliament waited until the 11th hour to finalise a crucial piece of tax legislation before breaking for Easter.

With trust tax changes coming into effect today, New Zealanders, households, their advisers, and not to mention the IRD, find themselves in the unenviable position of being subject to tax legislation that due to its hasty passage, has no official guidance.

For some time, those who provide advisory services in the trust sector have been warning that the proposal in the Taxation Bill to raise the trustee flat tax rate from 33 per cent to 39 per cent today (excluding charitable trusts) would significantly overtax many New Zealanders.

Notwithstanding the legislation was originally introduced to ensure trusts earning over $180,000 in income paid the same rate of tax as individuals paying PAYE, the previous Government ignored the fact trusts are subjected to a flat rather than progressive rate of tax.

Every dollar, from the first to the last, is currently taxed at 33 per cent, whereas an individual pays 10.5 per cent on the first $14,500, rising in brackets until it hits 39 per cent.

Under the new laws, a trust with income of $14,000 a year which would otherwise be taxed at 10.5 per cent was proposed to be taxed at 39 per cent.

There are between 400,000 and 500,000 trusts in New Zealand.

They are used by all sorts of New Zealanders to structure their financial affairs, from small business owners, to farmers, to those starting new relationships. The vast bulk of these do not earn anything like $180,000.

However, some measure of good news emerged from the halls of power after Nicola Willis took over stewardship of the changes from David Parker, who introduced them when he was Revenue Minister.

In a neat piece of political circumnavigation, the new Government has taken on some of the exemptions the tax select committee proposed based on earlier Government advice.

These exemptions are important, and reflect a view among many experts.

That view was expressed in two written and verbal submissions Perpetual Guardian made to the select committee in the last nine months, that although the intent of the law change was to target trusts with income over $180,000, the real world effect would be a general overtaxing of estates and trusts in New Zealand, the majority of which have income below this threshold.

Revenue Minister Simon Watts estimates about 13 per cent of trusts in New Zealand are likely to be impacted by the change to the top rate. Photo / Supplied

A $10,000 minimum income threshold will now be included in final legislation.

This means the legislation continues to overtax those trusts with income between $10,000 and $180,000, but Revenue Minister Simon Watts estimates “only around 13 per cent of trusts in New Zealand are likely to be impacted by the change to the top rate”.

While we question that estimate, the introduction of even a low minimum will be welcomed by the great many ordinary Kiwis who had established trusts for legitimate purposes and weren’t using them to slide unseen income past the IRD.

Other recommended exemptions – still to be confirmed – are trusts settled for disabled beneficiaries, which will still be taxed at the existing rate of 33 per cent, and immediately distributable estates, which will stay at 33 per cent for up to three years from date of death before the tax rate increases to 39 per cent.

Meanwhile, a proposed tweak to income settings means any beneficiary income distributed to a close company beneficiary will be taxed at the trust rate of 39 per cent rather than the company rate of 28 per cent. In all other situations the trustee tax rate will increase to 39 per cent.

Likely impacts

There are some effects of the new legislation (with expected exemptions) that we can be reasonably sure of at this stage:

· If income above $10,000 is retained by a trust rather than being paid or credited to a beneficiary’s current account, and the beneficiary has a low to medium tax, then over-taxation will occur.

· Where trusts retain income over $10,000 per annum, resident withholding tax (RWT) rates will need to be increased to 39 per cent in April 2024.

· There is no proposed increase to the prescribed investor rate for PIE funds. The increase of the trustee tax rate to 39 per cent means there is a greater tax incentive to invest in PIE funds, which have a 28 per cent tax rate.

· The increased tax rate will result in larger taxation payments, which may require more cash to be held. It may also lead to more trusts having to pay provisional tax.

· Like other professional advisers and trustees, Perpetual Guardian will review the bill when it is made law to ensure there are no additional changes.

It will also review the Inland Revenue Interpretation Statement upon its release to understand how the department will enforce the rate change, and will run training sessions to explain the final changes and likely effects.

The lateness of the passage of the bill means Inland Revenue has not yet released guidelines. Therefore the agency is likely, as it has done before, to apply a moratorium while the law’s effects are being fully understood and explained.

The message to everyday Kiwis with trusts, however, is to use this grace period to take advice from experts.

Inland Revenue does not accept confusion as a reason for non-compliance – as justified as that confusion may be.

Patrick Gamble is chief executive of the Perpetual Guardian Group.