Trustee tax increase 'is response to spike in trust use to avoid tax'

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A spike in the amount of income being put through trusts is behind the Government’s decision to bring the trustee tax rate into alignment with personal tax, Revenue Minister David Parker says.

As part of the Budget, the Government announced that it would raise the tax rate on trusts from 33% to 39% from 2024.

Parker said new information from Inland Revenue showed an almost 50% spike in income subject to the trustee rate when the new 39% personal income tax rate came into effect.

The amount going through trusts had jumped from $11.4 billion in the 2020 tax year to $17.1b in the 2021 tax year – a $5.7b increase.

“The report also shows that a substantial number of the super-wealthy funnel their income through trusts which minimises their tax bill. This change remedies that,” Parker said.

Parker said the change would improve the fairness of the tax system.

Trusts are a legal vehicle that people can use to place assets within, and are typically used to protect assets from people whom their creator might owe money to, or to ensure the proceeds or ownership of the assets are passed on to family members or used in a certain way after the settlor’s death.

“When the Government put in place the 39% top personal income tax rate in 2021, IR and Treasury also recommended aligning the trustee rate to 39%” Parker said.

“Ministers made clear then that if analysis indicated high-income earners were circumventing the rate through greater use of trusts, the Government would move to address this issue.”

Previous analysis by Valocity also found a substantial increase in the number of homes owned by trusts, up 48% between 2015 and late 2021.

Auckland University law professor Mark Henaghan said the increase was down to one thing – a growing awareness of how trusts could be used to reduce tax bills.

But the Taxpayers’ Union condemned the Government’s announcement. Campaigns manager Callum Purves said it betrayed a suggestion from Labour that there would be no new taxes in the budget.

”The Government is trying to justify this tax hike by pointing to the most wealthy,” he said. “But those people can keep money within company structures and pay the 28% company tax rate. In reality this tax grab will hit small business owners who often hold business in trusts for legitimate reasons.”

Taxpayers’ Union spokesperson Jordan Williams said the tax was likely to miss the wealthiest, because this group would have less need to pay out company earnings to a trust or beneficiaries.

They would therefore more likely simply recirculate and reinvest earnings within a trust-owned company or business and avoid the new tax rate.

“All roads lead back to when you de-couple the company tax rate from your top marginal rate, and from your trust rate, which is somewhere in-between, that you end up with incentives to structure affairs in a tax efficient way.”

Williams said the details of the change were not yet known, and it was possible some exemptions would apply – such as a 33% tax rate being retained where trust earnings were distributed to the children of the settlor.

Chris McKeen/Stuff

Family law professor Mark Henaghan believes many properties are put into trusts by landowners to avoid their tax burden.

Trust lawyer Andrew Logan said the decision was no surprise, given the disquiet IR had voiced at the non-alignment of personal and trust tax rates.

“They created this position, now they’re fixing it,” he said.

Logan said he had been advising clients for a while not to base their strategy on the status quo remaining in place.

Trust law expert Andrew Logan says there is a difference between tax evasion, which is illegal, and tax avoidance, which is legal.


Trust law expert Andrew Logan says there is a difference between tax evasion, which is illegal, and tax avoidance, which is legal.

Parker said the day’s announcement was a step towards righting an unfairness in the tax system, and a small proportion of trusts would pay most of the additional tax.

“The top 5% of trusts with some taxable income in the 2021 tax year accounted for 78% of all trustee income – $13.3b out of $17.1b.”

The increased tax was estimated to raise approximately $350 million per year.

“As I said last month when I released IRD’s High Wealth Individuals research, there is a large difference between the average tax rate ordinary New Zealanders pay on their full income compared to the super-wealthy. This change is this Budget’s response to that research.

“This change also balances the need to ensure that high-income earners are paying their fair share of tax, while not over-taxing trusts with lower-rate beneficiaries.

“Trusts with lower-rate beneficiaries can continue to use existing rules to mitigate over-taxation.”

Parker said New Zealand was an international outlier in taxing trustee income below the top personal tax rate.

Australia, Canada, the United Kingdom, and the United States had broadly comparable tax regimes and trust laws to New Zealand, and all align their trustee tax rates with their top personal tax rates.

“The Government is also proposing targeted measures to prevent over-taxation of trusts in certain situations, such as deceased estates and trusts for disabled persons, to allow trustee income of an eligible trust to be taxed as though it is the income of deceased person or the disabled beneficiary of the trust,” Parker said.

Chartered Accountants Australia and New Zealand country head Peter Vial said it was a surprise.

‘Whether this is a ‘major tax change’ is a moot point.

“The $5.7b spike in income taxed at the 33% trustee rate in the first year of the 39% top marginal tax rate is all the evidence that the Government needed to respond.

”It is a relief to hear that the trustee rate change will be subject to full Select Committee scrutiny. This should allow the opportunity for any unexpected consequences and issues to be addressed.”