Gaming the system? Teens among highest earning beneficiaries of trusts - IRD

Beneficiaries of trusts aged between 16 and 20 received an average of $19,000 in 2022. Photo / Monkey Business Images

Special data published by Inland Revenue supports word on the street that trustees tend to use children to minimise their tax bills.

There was a spike in the amount of income beneficiaries of trusts aged between 16 and 20 earned in the 2022 tax year.

The average income of this age group of beneficiaries was the second highest of all groups, behind 61 to 65-year-olds.

Beneficiaries of trusts aged between 16 and 20 received an average of $19,000 in 2022 – more than the $10,000 average received by 21 to 25-year-olds and the $5000 average for 26 to 30-year-olds.

The trend doesn’t surprise Deloitte partner Joanne McCrae, as 16 to 20-year-olds tend to have low incomes and therefore low personal income tax rates.

It could make sense for a trustee to distribute income earned from assets held in their trust to a 16-year-old, who only pays 10.5 per cent tax on the small amount they earn from their summer job, as opposed to the teen’s high-earning parent, who has a marginal income tax rate of 39 per cent.

The data shows this is common practice, with 16 to 20-year-olds earning much more beneficiary income, on average, than other age cohorts – under-45s in particular.

McCrae said there was nothing wrong with this, provided the distribution was genuine.

The genuineness of a payment would be questionable if, for example, the trustee made the 16-year-old beneficiary use the funds to pay their school fees. This is because parents are responsible for paying compulsory school fees and donations, not children.

If, however, the trust income was used to pay optional fees for school trips or additional private school costs, the benefit to the beneficiary could be legitimate.

Similarly, if the trustee told the 16-year-old beneficiary that the income distributed to them was for their university fees or their first home, that would be fine according to McCrae.

She said there was often a lot of debate around what was or wasn’t an appropriate use of trust income paid to young beneficiaries.

Ultimately, a trustee must ensure that income distributed to a child beneficiary isn’t spent on things that benefit the parents (rather than meet the child’s needs) or on expenses that the parents are obliged to take care of.

McCrae suspected some trustees allowed parents to use their children to game the system.

The Government has attempted to prevent tax avoidance through the “minor beneficiary rule”, which requires certain distributions of beneficiary income to under-16s to be taxed at 33 per cent.

Inland Revenue said this rule appeared to be working. Indeed, the average income received by beneficiaries under 16 was only $1000 in 2022 (compared to $19,000 for 16 to 20-year-olds).

McCrae recognised it would be difficult to extend the minor beneficiary rule to 18-year-olds because there are 16 and 17-year-olds in fulltime work who are treated like adults in many other respects.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.