Budget Summary for Small Business Owners with Trusts in 2024

What do the latest announced tax 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 how trusts in NZ are taxed

Concessions:

1. Small Trusts: Trusts with up to $10,000 of net trustee income per year will still be taxed at 33%.
2. Estates: Estates will be taxed at 33% for the year of death and the following three years, then at 39%.
3. 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:

• 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 afterwards.
• 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. These are outlined below.

• 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.

What does that mean for your trust?

Small business owners with trusts should review their trust structures and consider these guidelines to ensure compliance and avoid potential issues with Inland Revenue.

If you’re a business owner navigating these changes, we encourage you to get in touch with us. As experienced advisors, we can provide personalized advice and help you determine the best strategies for managing your trust under the new tax regulations. Let us assist you in making informed decisions to optimize your trust’s financial health and compliance.

Together we can achieve more.