Revealed: Nicola Willis may exempt some trusts from planned tax hike

Finance Minister Nicola Willis says tweaking the former Labour Government's planned trustee tax hike is affordable. Photo / Mark Mitchell

Finance Minister Nicola Willis has revealed the Government wants to exempt some trusts from paying the new 39 per cent trustee tax rate.

She told the Herald the Government planned to modify the bill aimed at lifting the trustee tax rate from 33 per cent to 39 per cent from April 1.

She wouldn’t elaborate on what the changes would look like, but said the Government was looking at “carve-outs” and a “de minimis rate”.

Deloitte accounting firm partner Robyn Walker suspected this could involve applying the 39 per cent tax rate to higher-income earning trusts, leaving lower-income earning ones to be taxed at the current 33 per cent rate.

Willis – who is yet to confirm exactly what her promised income tax cuts will look like, and how quickly the interest limitation tax rule for property investors will be phased out – was confident that reducing the tax burden on trusts was affordable.

The Labour-led Government wanted to lift the trustee tax rate to ensure it aligned with the new top income tax rate, applied to income over $180,000, from April 2021. It feared that if the two rates weren’t the same, people would use trusts to avoid paying income tax.

Inland Revenue estimated the change would increase the Crown’s tax take by about $350 million a year.

However, the industry group Chartered Accountants Australia New Zealand repeatedly made the point that most trusts earn less than $180,000 a year, so taxing them at the rate applied to individuals’ income above $180,000 would be unfair.

It noted that according to Inland Revenue, only 11 per cent of the trusts required to make disclosures in the 2022 tax year received taxable income above $180,000.

The group accepted it was “entirely fair” for these trusts to be taxed at 39 per cent, noting they earned a whopping 81 per cent of the income.

However, it believed applying the 39 per cent rate across the board would cause “significant collateral damage”.

It suggested trusts that earned more than $100,000 could be taxed at 39 per cent and those that earned less could be taxed at 33 per cent.

Willis said details of the Government’s plans would be included in its updated Taxation (Annual Rates for 2023-24, Multinational Tax and Remedial Matters) Bill.

The bill was introduced to Parliament in May last year. The public has had a chance to provide feedback to the Finance and Expenditure Committee, ahead of its second reading.

Walker warned that a two-tier system could encourage trustees to break up high-earning trusts into multiple lower-earning ones to minimise their tax bills.

However, she believed Inland Revenue could keep tabs on this if it saw multiple trusts formed with the same trustees and beneficiaries.

Willis remains committed to getting the Government books into surplus by 2026-27, aiming to pay for tax cuts by lifting benefits by less than the previous Government committed to, and by cutting public sector jobs.

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.