New Trustee tax rate
New Trustee Tax Rate
The Act amends the Income Tax Act 2007 to increase the trustee tax rate from 33% to 39% effective from 01/04/2024.
The new legislation also introduces measures to mitigate over and under taxation, including;
- Retaining the 33% rate where trustee income for the income year does not exceed $10,000 after deductible expenses (De minimis trust)
- 39% trustee tax rate by taxing beneficiary income derived by certain close companies at the 39% trustee tax rate.
- Deceased estates are excluded from the 39% trustee tax rate and remain subject to a 33% rate in the income year the estate was created, and the following three income years.
Example 1. (Old trustee tax rate vs New trustee tax rate)
In 2024 financial year, Shine trust generated taxable income $30,000 and retained the income in the trust. Tax on the $30,000 under old trustee tax rate the trust only needs to pay $9,900 but for under the new trustee tax rate, the trust has to pay $11,700.
Example 2. (De minimis trust)
In 2025 financial year, Shine trust earns $20,000 of income and have $2,000 of deductible expenditure and beneficiary distribution of $5,000. The trustee income of $13,000 will be taxed at the new trustee tax rate of 39% as it is greater than $10,000 de minimis trust threshold. If the trust distributed $8,000 to beneficiary, the trust is a de minimis trust and the trustee income is taxed at 33%.
Example 3. (Corporate beneficiary rule)
The corporate beneficiary rule applies if a close company earns an amount of beneficiary income from a trust (Trust A) and any voting interest or market value interest, directly or indirectly, in the company is held by at least one of the following:
- Criteria 1: a settlor of Trust A,
- Criteria 2: the trustees of Trust A,
- Criteria 3: a person for whom a settlor of Trust A has “natural love and affection”, or
- Criteria 4: the trustees of another trust (Trust B), if a settlor of trust A has “natural love and affection” for a settlor or a beneficiary of Trust B.
Su and John have natural love and affection for each other and are each separately the settlors of the Shine Trust and the Darken Trust, respectively. Darken Trust is the sole shareholder of a close company, Darken Ltd. Since Su has natural love and affection for John, if the trustees of the Shine make Darken Ltd a beneficiary of the trust, then the company will satisfy Criteria 4. Any beneficiary income paid by the trustees of the Shine Trust to Darken Ltd will be subject to the corporate beneficiary rule and taxed at 39%. Darken Ltd is a close company and is not a registered charity, Māori authority, or the beneficiary of a securitisation trust, so is not excluded from the corporate beneficiary rule.
Example 4. (Deceased estate)
Josh died in August 2023, so his deceased estate was formed in the 2023–24 income year. Josh’s estate earns income from a commercial rental income and taxable income was $20,000 each year. However, the trustee of his estate cannot distribute this income for many years after his death. This is because it is unclear who the beneficiaries of his estate are due to an ongoing dispute between his siblings, John and Lucy.
Josh’s estate was created in the income year before new section HC 8B came into effect, when the trustee tax rate was 33%. Josh’s estate is also eligible to apply the 33% tax rate for deceased estates on trustee income for the 2024–25 to 2026–27 income years, inclusive.
In the 2027–28 income year (the fourth income year after the year during which the estate was created), Josh’s estate no longer qualifies for the 33% tax rate for deceased estates. This means that trustee income earned by Josh’s estate is subject to the 39% trustee tax rate (unless the deceased estate is a de minimis trust for that income year).
For further assistance, please feel free to contact us.
The information contained within this website is provided for information purposes only and is not intended to substitute for obtaining accounting tax or financial advice from a professional accountant.
