Budget Summary for Small Business Owners with Trusts in 2024
Richard Matson
What do the latest changes mean for small business owners with trusts in New Zealand?
Starting from the 2024/25 income year (1 April 2024), the tax rate for trustee income has increased from 33% to 39% to match the top personal tax rate.
Key points and guidance related to this change:
Concessions
Small Trusts
Trusts with up to $10,000 of net trustee income per year will still be taxed at 33%.
Estates
Estates will be taxed at 33% for the year of death and the following three years, then at 39%.
Special Trusts
Disabled beneficiary trusts, energy consumer trusts, and legacy superannuation funds remain at a 33% tax rate.
Trustee Actions and Tax Avoidance
To avoid being seen as engaging in tax avoidance, trustees can consider these actions, which are unlikely to be regarded as tax avoidance:
Dividend Policy Changes
A company owned by a trust can change its dividend-paying policy, such as paying out retained earnings before the new tax rate applies or reducing dividends afterward.
Income Distribution
Distributing trust income to beneficiaries, who are taxed at lower rates than the trustee rate.
Company Incorporation
Transferring income-earning assets to a newly formed company, which is taxed at 28%.
Winding Up a Trust
Ending the trust's operations.
Investing in PIEs
Investing in Portfolio Investment Entities (PIEs), which are taxed at a maximum rate of 28%.
Inland Revenue's Stance
The Inland Revenue has flagged certain actions that might raise questions:
Beneficiary Resettlement
Allocating income to a lower-taxed beneficiary who then resettles the same amount back to the trust.
Unaware Beneficiaries
Allocating income to a beneficiary who is unaware or not expecting it.
Artificial Loans
Replacing dividend income with loans that don’t reflect the true nature of the arrangement.
Timing Alterations
Changing the timing of payments (advancing or deferring) to manipulate tax outcomes.
Unrealistic Income/Expenditure
Creating or increasing income/expenditure that doesn't reflect reality, such as with interest, dividends, or fees between related parties.
Small business owners should review their trust structures and consider these guidelines to ensure compliance and avoid potential issues with Inland Revenue.
