Introducing Change: Labour Increases Tax Rate for Trusts' Retained Income to 39%
In the evolving landscape of Labour's tax policies, recent changes by the Labour government have created a few shockwaves. The new measure, announced in the 10 May 2023 budget, raises the tax rate for trusts which retain income to 39%, aligning it with the top personal tax rate. This shift has sparked a flurry of discussions and raised concerns among individuals and families relying on trusts for financial management and asset protection.
The intention behind this change became evident when the Labour Party tasked the Inland Revenue Department (IRD) with conducting research on high-wealth individuals. It was clear to us that the government aimed to utilise this research as a basis for increasing the tax rate for trusts. Fast forward to 18 May 2023, and the budget announcement made it official—the tax rate increase will come into effect on 1 April 2024. Revenue Minister David Parker's press release is here.
This change will not directly impact trusts that distribute all of their income to beneficiaries. However, its ripple effects will be felt by Trustees who choose to retain income within the trust. For these trusts a higher tax burden awaits.
To better understand the implications of this change, let's explore a few real-life scenarios:
The Johnson Family: The Johnsons have set up a trust to manage their wealth and safeguard their assets for future generations. Until now, they have retained a portion of their trust's income in the Trust, and the Trust has paid out capital to fund educational expenses for their children, who are all below the age of 16. Under the previous tax regime, this income was subject to a 33% tax rate. However, with the new change, any retained income will be taxed at the higher rate of 39%, beginning 1 April 2024. The Johnsons will need to reassess their financial strategy and explore alternatives to ensure their children's education is adequately funded while minimising the impact of increased taxation.
The Wilsons' Investment Company: The Wilsons, a wealthy family, have an investment company owned by their trust. The company pays tax at the standard rate of 28%. However, under the new rules, if the trust receives dividends from the company and chooses not to allocate them to beneficiaries, it will be subject to tax at its own rate. This means that the Wilsons' trust will now face a tax rate of 39% on any dividends received, but with an imputation tax credit for the 28% company tax already paid. This change will force the Wilsons to reconsider the most tax-efficient approach for managing their investments and distributing income.
(Note: The scenarios provided are hypothetical and intended to illustrate the potential impact of the tax rate)
These changes create an environment in which trustees must ensure compliance and maximise their financial outcomes. From 1 April 2024, trustees may need to consider allocating income to beneficiaries earning less than $180,000 unless a future government reverses these changes.
As New Zealand's tax landscape continues to evolve, it is important to stay informed and work with professionals who can guide you through the intricacies of trust law and taxation. Ross Holmes Virtual Lawyers Limited is committed to helping clients understand and navigate these changes (in conjunction with your accountants), ensuring their long-term financial well-being.
