A shockwave is due to roll over New Zealand trusts in just a few weeks, adding (on average) more than $22,000 to the annual tax bill of the estimated 44,250 trusts caught in its wake – unless they take action now.
Due to come into force on April 1, the well signalled jump in the trustee tax rate from 33 per cent to 39 per cent will largely impact the top quarter of New Zealand trusts with assessed income that pays almost all of the tax levied on the sector.
Meanwhile, the top 5 per cent of trusts, roughly 9,000, account for close to 80 per cent of the trustee income tax impost across the industry.
Trustee tax rates
The former Labour government-initiated move brings the trustee tax rate in line with the top marginal rate but – unlike the stepped thresholds for individuals – applies across all income.
And following an earlier Labour-led change that made beneficiary distributions less attractive for many trusts, the scale of top-end taxable “trustee income” soared from $11.4 billion in 2020 to $17.1 billion in the 2021 financial year, according to Inland Revenue.
The statistics imply the 9,000 highest earning trusts generated an astonishing $13.4 billion of trustee income between them in 2021 – or almost $1.5 million each on average: for the top 25 per cent highest earning trusts the average trustee income computes to around $388,000.
Based on the IRD data, the hike would see those income-producing trusts pay an average extra $22,000 in trustee tax in the next financial year, a figure which rises to $88,000 for the top 5 per cent of income-producing trusts.
Investment action plan
Despite the shocking headline numbers, trusts can easily limit the damage by shifting investment assets, where possible, into portfolio investment entity (PIE) funds.
PIEs feature a top tax rate of 28 per cent, which, crucially, is a final tax for all investors. Even at the current 33 per cent tax rate, PIE managed funds are compelling investment vehicles for trusts but at 39 per cent the decision should be a no-brainer.
Assuming trusts can switch all their income-producing assets into like-for-like PIE managed funds, our analysis suggests the 44,250 trusts due to bear the brunt of the increase would pay an average $41,000 or so less in the coming tax year than if left facing the 39 per cent rate.
Under the same assumptions, for the top 5 per cent highest earning trusts shifting PIEs would lower their next annual tax bill by about $162,000 on average compared to sucking-up the full new higher rate.
Of course, not all assets have a PIE equivalent – especially, illiquid ones like private businesses or property – but trustees need to work with their professional advisers such as lawyers, financial planners and accountants to identify the best tax-effective solutions for their investment assets.
When it comes to trustee income, PIE managed funds can offer considerable tax savings compared to directly held cash, shares, bonds, term deposits et al, while maintaining the overall trust investment exposure.
By our calculations, in real terms trusts that don’t adjust their asset structures could pay up to 40 per cent more in tax in the 2024/25 financial year versus those that move to PIE managed funds.