13 March 2024 update 

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill has returned from select committee. This particular Bill, if enacted as it currently sits, will see the tax rate on trustee income increase from 33% to 39% with effect from 1 April 2024. 

While rumours of a two-tier trust tax rate were confirmed, the threshold is de minimis and considerably lower than had been suggested by the Minister of Finance. 

As it currently sits, the Bill would see the 33% trust tax rate retained for the following: 

• Trusts with less than $10,000 of income
• Disabled beneficiary trusts
• Deceased estates in the year of death and the first three full income years following death
• Energy consumer trusts (for example, Entrust in Auckland) 

Proposals to use the marginal tax rates of beneficiaries for disabled beneficiary trusts and the deceased individual for deceased estates in the first year following death have been abandoned due to administrative complexity. 

No specific anti-avoidance measures have been implemented around the $10,000 of income rule. The logic of the select committee is the costs of compliance would outweigh the limited tax benefit obtained. 

08 February 2024 update

The Bill increasing the tax rate on trustee income from 33% to 39%, with effect from 1 April 2024, was reintroduced late last year by the present Government. Although still in Bill form, it is expected to be law by the end of March. 

The increase in the trustee tax rate to 39% has given rise to much interest in restructuring and other activities to reduce exposure to the new rate (which is designed to be the same as the top rate applying to individuals).

Several scenarios have brought concern to some tax commentators as they could be seen as tax avoidance. In the “General Article”, Inland Revenue has commented on several scenarios, all of which are applicable to straightforward situations, but may not apply where there is an element of artificiality or contrivance: 

A company is owned by a trust and changes its dividend-paying policy

For example, paying a higher dividend than normal to be taxed at 33%, rather than 39% if paid after 1 April 2024. In most cases this would not be tax avoidance. However, it could give rise to concerns where a dividend has been paid by crediting shareholder current accounts, but the company objectively has no real ability to pay those credit balances if it were to be liquidated. 

A trustee distributes income to a beneficiary so it is taxed to the beneficiary rather than at the trustee tax rate 

This should not be tax avoidance but could heighten concerns where, in reality, the beneficiary is not entitled under the trust or will not benefit from the distribution. 

A trustee adopts a company structure and transfers its income-earning assets to the company 

This means company tax of 28% applies to the income rather than the new 39% trust tax rate, however there would be a top-up when the company distributes profits to the trust. Inland Revenue is comfortable this is unlikely to be tax avoidance but could create concerns where a holding company is interposed between an existing operating company and trust, or where personal services income is diverted by structuring revenue-earning activities through a company. 

A trustee chooses to wind up the trust

This should not be tax avoidance.

A trustee chooses to invest in a portfolio investment entity

This should not be tax avoidance.

Further scrutiny

Inland Revenue has also suggested the following situations might give rise to further scrutiny:

• Allocating income to a beneficiary taxed at a lower rate under an arrangement in which that amount is resettled back on the trust.
• Allocating income to a beneficiary taxed at a lower rate by crediting the beneficiary’s current account where the beneficiary has no knowledge of the allocation or no expectation of receiving the income.
• Replacing dividend income with loans in an artificial manner such that the loans do not reflect the reality of the arrangement.
• Artificially altering the timing of any taxable or deductible payment.
• Creating or increasing income or expenditure that does not reflect the reality of the structure or arrangement.

Comment

Much could be read into the fact this article was released on a Friday afternoon before a de facto long weekend where the attention of many was directed elsewhere.

It once again emphasises that Inland Revenue is interested in transactions with artificial or contrived features, but accepts that undertaking some actions because it gives a better tax result can be permissible. Given the line between a legitimate transaction and tax avoidance is thin, we would strongly recommend contacting your Baker Tilly Staples Rodway advisor if you are considering clearing retained earnings, changing a dividend distribution policy or anything significant involving a trust in advance of 31 March.