From 1 April 2024, the trust tax rate rose to 39%, matching the top personal marginal tax rate. While this change may seem significant, trusts remain one of the most flexible tax planning vehicles in New Zealand.
Now is the time to review your trust structure to ensure you’re maximising its benefits.
Income Allocation To Beneficiaries.
While the trust tax rate is now 39%, trustees can still allocate income to beneficiaries instead of paying tax at the trust rate. This means that the beneficiaries return the income in their personal tax return and pay tax at their personal marginal rate. This can save quite a bit of tax given that marginal income tax rates vary from 10.5% upwards, and only reach 39% when income crosses the $180,000 threshold. Trustees should be talking to their accountants to see how income splitting might work in the trust.
Considering Portfolio Investment Entities (PIEs).
Trustees can also consider whether Portfolio Investment Entities (PIEs) are right for the trust. PIE investments are an investment vehicle which have a flat rate of tax applied at 28%. They were introduced as a way of incentivising New Zealanders to invest in diversified portfolios and save for their retirement. If a trust invests in a PIE, it won’t be paying tax at 39% on any income, but will only be taxed at 28%.
Reviewing Retained Earnings In Companies.
Any trust which owns shares in a closely held company should be looking to see if there are any retained earnings in the company. If yes, the directors of the company should be considering whether they ought to declare a dividend prior to 31 March 2024 to take advantage of the trust tax rate still being at 33%. There are a number of factors to consider, and it should be discussed with the company accountant.
If you feel you could use some specialist advice, don’t hesitate to contact the Trusts & Wealth Protection Team.