Kiwis love trusts.  So much so, that we have the most trusts per capita of any country; there is estimated to be one for every 12-15 people, with most owned by everyday Kiwis protecting their family homes.  When the Government announced that the trustee tax rate would increase from 33% to 39%, it may have felt like an unwelcome shock to many everyday Kiwis already feeling the financial pinch.

From 1 April 2024, any income earned and retained by a trust will be taxed at a flat rate of 39%, in line with the top personal tax rate. This is significantly more than the average Kiwis’ personal tax rate however there are exceptions:

1. If a trust distributes or allocates any income to an adult beneficiary (16 years or older), then the tax rate on that income will match that beneficiary’s personal tax rate. Trustees should speak with their trust accountant about any proposed income distributions as this may differ for beneficiaries under 16. The beneficiary should also be within New Zealand, otherwise there may be foreign tax issues to address.
2. If a trust is formed specifically to provide for a disabled person, the trustee’s tax rate will also match the disabled beneficiary’s personal tax rate. If you have settled a trust for this purpose, you should ensure the disabled beneficiary is the only beneficiary under the trust, otherwise this exception may not apply and the trustee tax rate will be 39% on any income not distributed.
3. Although a trust relationship is technically formed under a will (with the executors and trustees holding the deceased’s property before administration), there is a 12 month grace period following the date of death where any income generated from the deceased’s estate will be taxed at the deceased’s personal tax rate immediately prior to death.

The trustee tax rate changes appear to be designed to close off any income funnelling loopholes. It will encourage estates to be wound up within 12 months to avoid the higher tax rate, but whether this is a practical timeframe for estates is questionable.

Should a trust wishes to lower its tax obligations, the trustees should regularly consider exercising their powers to distribute trust income, weighing up the benefits and the requirements of the trust’s beneficiaries with the trust’s purpose. Regular consideration of exercising trustee powers is one of the default duties reinforced on trustees under section 32 of the Trusts Act 2019.

Any planned distributions must be made carefully, to ensure compliance with the trust’s terms and purpose. Your trust should have an independent trustee who can impartially review and agree to any decisions, to help legitimise the trust’s actions. However, if you are unsure whether any planned distributions may affect your trust, consider seeking independent tax advice beforehand.

To find out more, or if you have a trust which may be affected under these changes and you wish to discuss these, please call CS Law on 06 368 9239 and ask for the Trusts team. We will be happy to make an appointment to answer any questions.