Tax Updates: 15 April 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

New trustee tax rate

Hard on the heels of last week’s two special reports released by Inland Revenue (IR) is a third, which covers the new trustee tax rate. Just in case you’ve had your head stuck in the sand for the past few weeks, it has increased to 39% effective 1 April.

You wouldn’t think there would be much to talk about in the report (it’s not exactly rocket science); however, there are 30 pages in the document, which provides guidance on:

• The basic principles surrounding trustee income, beneficiary income (including minor beneficiary income) and corpus.
  
• The de minimis rule – trusts with trustee income not exceeding $10,000 (after deductible expenses) are still subject to a 33% tax rate on trustee income (exceed the threshold, however, and every dollar of trustee income is taxed at 39%).
  
• A timely reminder that fragmenting your existing trust into multiple trusts (as each trust is considered separately when applying the de minimis rule) could raise tax avoidance questions from IR.
  
• Confirmation that applying the ‘minor beneficiary rule’ will now result in the income being taxed at the 39% trustee tax rate—it’s important to note that this is irrespective of whether the trust is a de minimis trust.
  
• A new corporate beneficiary rule to ensure that the 39% rate cannot be avoided by distributing the trustee income to a corporate beneficiary (to either offset tax losses or be subject to the corporate tax rate of 28%). Now, not all corporate beneficiaries will be caught:
  
  Is the company a close company (five or fewer people/trustees >50% of voting interests (associated persons counted as one person), owned by the trust or its settlor (or by a person the settlor has a natural love and affection for)? Or, alternatively, is the company owned by a second trust, where the settlor of the first trust has a natural love and affection for the settlor/beneficiary of the second trust? If your answer is no, then you’ve hit the jackpot, and the new corporate beneficiary rule will not apply to you. Note that both directly and indirectly held voting interests/market value interests in the company are considered.
  
  When the corporate beneficiary rule applies, the 39% trustee tax rate will apply. In this regard, the income distribution will be excluded income in the corporate beneficiaries’ hands. The amount will be deemed a capital gain for ACDA purposes (ensuring the amount is not taxed again upon the liquidation of the company), and there is no IC credit in relation to any tax paid by the trustees on the income.
  
  There is a wholly owned group dividend exclusion, whereby if a company in a wholly owned group pays a dividend to the trust, with the trust distributing that dividend to another company within the wholly owned group, then the corporate beneficiary rule will not apply.
  
• Deceased estates are excluded from the 39% tax rate in the income year they are created and for the following three income years. This rule applies to any deceased estate (those pre and post enactment of the Act), and once the four-year period has expired, a deceased estate could also qualify as a de minimis trust. Otherwise, its trustee income will commence being taxed at 39%.
  
• Finally, there is also an exclusion for disabled beneficiary trusts – trusts settled for one or more disabled beneficiaries. The trustee income of these trusts remains taxable at 33%.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.