When it was revealed the tax rate on trustee income would be increased from 33% to 39% from 1 April 2024, there were understandably a few feathers ruffled. It was a sledgehammer approach which proposed significant collateral damages to small and medium sized trusts.
We can understand the ‘why’ behind the move. Tax works differently for trusts. Since the introduction of the 39% personal tax bracket in 2021, there have been concerns expressed that people would use trusts as a means to divert some of their income to be taxed at the lower 33% rate. So, the new Bill is a way to ensure these high earners will still pay the correct tax whether they earn their income directly, or through a trust.
Yet, there’s all sorts of reasons why trusts are formed. Many of them involve intergenerational assets, business continuity, privacy and confidentiality, or even charitable giving.
In a little under two months' time, we now know there will likely be some exemptions to the rule and the current 33% rate or lower will apply:
· Trusts with less than a $10k annual income (de minimis)
· Disabled beneficiary trusts
· Deceased estates in the year of death (and first three full income years following)
· Māori Trusts
· Energy consumer trusts
This will be a relief to many with low-income trusts. Up to 89% of them earn significantly less than the $180k it would take for an individual’s income to be taxed at that same 39% rate.
But the devil will be in the detail, such as whether the mooted $10,000 de minimis exception is on trust income or profit – the difference is like night and day!
Back to the feather ruffling. It appears that some have jumped the gun and restructured their entire portfolio structures, with many opting for a move to more tax-friendly portfolio investment entities (‘PIE’s). Certainly, clients have asked us what our thoughts on the matter are, and if they should be doing the same.
But changing the structure of your portfolio is not at all a straightforward process and shouldn’t be done without serious consideration. It requires selling the existing portfolio, then buying the new one – which is quite a process. It can be expensive due to trading costs, carries the risk of being out of the market, locking in losses depending on current performance, and the long-term costs of a PIE are typically higher than the previously held asset.
Some investors and financial advisers have already done this... only to then find out that many investors likely wouldn’t meet the requirement to pay 39% anyway! It is not a simple one size fits all scenario, nor will the tax position remain static year on year.
A trust’s tax bracket would be determined by its retained earnings only. That’s after beneficiaries have received their payments, which are at lower rates than 39%. There is still a lot of wiggle room to distribute the income among beneficiaries, who still must earn $180k to be taxed at 39%, before the retained income would be taxed at that rate.
The new situation, with adjusted rules, would mean only 49,000 of 400,000 trusts in NZ are likely to be impacted (as indicated by Finance Minister, Nicola Willis).[i] And, crucially, the Bill has not been finalised as at time of writing this article, so there could still be changes to come. In any case, it won’t come into effect or be confirmed until budget day, Thursday 30th May.
Tax calculations on any portfolio, including trusts and especially those outside NZ, are complicated. They will become more so as legislation is adjusted, as has been the trend for years now.
If you’re considering forming a trust, make sure you understand the admin, governance responsibility and tax implications.
If you are a trustee and are worried about whether tax changes will impact you – the Government’s stance indicates it likely will not. If you’re in the roughly 12.25% who will be taxed at the new 39%, make sure you are working with a trusted fiduciary who can assess all your options and plan or adjust accordingly to suit your best interests.
In this situation, many of those jumping the gun would have been better to be a little gun-shy instead. Legislative changes can happen fast, but to rush through selling off and rebuying assets and locking in a more expensive investment structure is usually not the answer to stay ahead of the curve.
Fear can be a powerful motivator, and your financial adviser should not be driven by it. The role of an adviser is partly to help keep emotions away from investment strategies, not to feed into knee-jerk reactions.
Those trustees who stayed the course may now be breathing a sigh of relief that actually, not much will change for them after all. As the old saying goes, ‘a bird in the hand is worth two in the bush’.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay and Wellington-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 350.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.beehive.govt.nz/release/trustee-tax-change-welcomed
