New Zealand Hikes Trustee Tax Rate After High Net Worth Review

The taxation of wealthy individuals and families is a hot topic in New Zealand. In April, the Inland Revenue released the results of its High-wealth individuals research project, and in May, two tax bills were introduced in parliament: the first proposes a 6% increase in the trustee tax rate, and the second deals with “taxation principles reporting.”

The Inland Revenue report highlighted two key points based on the data collected:

“The effective tax rate paid by middle income New Zealanders is at least double that paid by the wealthier New Zealanders.”
“A substantial amount of income (67 percent of the Project population’s economic income) was earned through trusts, either as trustee income or capital gains on trust assets.”

On May 18, the New Zealand government announced an increase in the trustee tax rate—a move described by the Minister of Revenue as being in direct response to the concerns raised in the Inland Revenue report and “a first step towards righting this unfairness.” The Taxation Principles Reporting Bill was also introduced in parliament, proposing a “a statutory framework for the reporting of tax information based on core taxation principles.”

What’s the Effect?

Increased trustee tax rate. If the trustee tax rate increase is enacted in its proposed form, the tax rate on income derived by trustees will increase from 33% to 39% starting April 1, 2024. The tax rate increase reflects Inland Revenue’s concern about the use of trusts to derive income that otherwise would be taxed at the top 39% marginal tax rate that has applied since 2021.

That concern is arguably supported by data showing a 50% surge in income subjected to the trustee tax rate from the 2020–2021 tax year. The report’s findings drew additional focus to this issue, highlighting that 67% of the economic income of research participants was accrued through trusts (either as trustee income or capital gains on trust assets).

Taxation Principles Reporting Bill. The bill doesn’t include any new taxes. It simply proposes a set of principles against which New Zealand’s tax system can be measured. The stated intention of this bill is to “allow for the observation of trends and provide insights into how the tax system is developing and responding to external challenges.”

Given the description of the principles included in the bill (including the comment above), some see it as a prelude to more fundamental tax reform in the future. In particular, the bill is noteworthy as it includes references to “economic income” (among other things)—the first time this term has been used in New Zealand tax legislation—and includes the following description of “vertical equity”:

“The tax system should be progressive. Tax is progressive if people with higher levels of economic income pay a higher proportion of that income in tax.

“In practice, wealthy people should at the very least pay no lower a rate of tax on their economic income than middle income New Zealanders already do.”

Collateral Damage?

One obvious issue with increasing the trustee tax rate to 39% is the risk of over-taxation of amounts ultimately distributed to beneficiaries who are subject to lower personal tax rates.

The announcement was accompanied by supporting commentary, with a section entitled “Mitigating over-taxation.” This included examples demonstrating how trustees could prevent over-taxation by making use of the existing trust income allocation rules. That is, trustees can allocate income to beneficiaries so that it is taxed at their personal tax rates.

However, there are concerns that the current beneficiary income allocation rules may be inadequate, given:

The complexity of allocating income where a trust has insufficient cashflows to make a distribution (an issue that is likely to become more pronounced following the application of interest limitation rules for rental property investments), and
The allocation of income to beneficiaries is at odds with asset protection, a standard objective of trust structures.

There also have been questions about Inland Revenue’s commentary indicating an allocation to a beneficiary could simply be resettled on the trust. Inland Revenue responded by amending this commentary to note “some uncertainty under existing law about the tax treatment of such a settlement.”

Time to Wind Up?

Other recent law changes have increased the administrative burden and cost associated with maintaining a trust in New Zealand. Notably, increased trust disclosure rules were introduced with effect from April 1, 2021, and greater transparency and compliance requirements have applied under the Trusts Act 2019 since January 2021.

Together with these changes, the new trustee tax rate may prompt some to question whether it’s time to wind up their trust. Such decisions only can be made on a case-by-case basis. However, relevant issues to consider include:

What purpose is your trust serving?
What alternative holding structures are available?
What are the tax impacts of moving to a new holding structure?

More to Come?

The increase in the trustee tax rate to 39% may not be the last tax change aimed at “wealthy people” and their trusts in New Zealand, considering the issues raised in the report and the “principles” outlined in the Taxation Principles Reporting Bill. Anyone with a New Zealand trust should keep a close eye on developments in this area.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Simon Akozu is a partner and Zoe Barnes is a senior associate with MinterEllisonRuddWatts.