The latest tax bill introduces a number of significant amendments to New Zealand tax law, including changes to implement the OECD’s global minimum tax proposals and otherwise, to provide tax relief to flood victims and recipients of backdated lump sum payments from ACC and the Ministry of Social Development. Of all the proposed amendments, however, the proposal to realign the trustee tax rate with the top marginal tax rate of 39% has attracted perhaps the most attention.
As introduced, the bill provided for a wholesale increase in the trustee tax rate, with limited relief offered to disabled beneficiary trusts and deceased estates. Submitters to the Committee identified a number of potential problems with the proposed increase, including that:
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- the increased rate would result in over-taxation for the vast majority of trusts, that derive annual income of less than NZ$180,000;
- the increased rate would detrimentally impact commercial entities (including trading trusts and securitisation trusts), energy consumer trusts and certain Māori trusts;
- the proposed concession for deceased estates was too short, being limited to 12 months following death;
- the definition of a disabled beneficiary trust was too narrow and would prevent trusts genuinely established for the benefit of disabled persons from accessing concessionary tax rates; and
- a proposed avoidance rule that would apply in respect of distributions to corporate beneficiaries was both unnecessary and unjustified.
The Committee has responded to each of these concerns, to some extent:
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- The new 39% tax rate will apply only in respect of trusts that derive more than NZ$10,000 of assessable income in a tax year. Trusts deriving income below this threshold will be subject to tax at the existing 33% rate.
- Energy consumer trusts and trusts that formerly qualified as widely held superannuation schemes will be subject to tax at the rates of 33% and 28% respectively, regardless of whether the NZ$10,000 income threshold is exceeded.
- The concessionary tax treatment for deceased estates will apply for a period of three years following the person’s death.
- The definition of a “disabled beneficiary” will be broadened to include a wider class of beneficiaries, and the definition of “disabled beneficiary trust” expanded to permit multiple beneficiaries.
- The specific anti-avoidance rule for distributions to corporate beneficiaries will be amended to exclude securitisation trusts.
However, the Committee has also recommended that deceased estates and disabled beneficiary trusts be subject to tax at a flat rate of 33%, rather than at the marginal tax rate of the deceased person or the disabled beneficiary (as relevant). This proposed change will result in an increased tax burden for many deceased estates and disabled beneficiary trusts, compared to the position under the bill as introduced.
It is expected that a number of trustees may seek to make additional distributions prior to 31 March 2024, in order to pre-empt the increase in the trustee tax rate. The Inland Revenue Department has issued general guidance regarding the types of transactions that it may regard as being acceptable or alternatively, as tax avoidance, which is available here.
If you would like to understand the impact of the proposed amendments to trustee taxation in further depth, including how these may apply to you personally, please get in touch with a member of our Tax team or your usual Bell Gully adviser.