Trustee tax rate increasing to 39%

Background and Policy rationale
The Budget 2023 announced a key change increasing the trustee tax rate from 33% to 39% from the 2024/2025 (generally 1 April 2024).
 
The trustee tax rate of 33% has been in place since 1989 and was intentionally chosen to align with the (then) top personal tax rate.  In 2020, a new top personal tax rate of 39% for income over $180,000 was introduced.  The trustee tax rate was not increased at the same time.  Since the trustee tax rate is a final tax, it is possible for individuals to obtain a tax advantage by earning income through a trust, thus circumventing the 39% top personal tax rate. 
 
This change is aimed at improving the integrity of the tax system by aligning the trustee tax rate in line with the top personal bracket of 39% which was introduced from 1 April 2021.
 
Mitigating over taxation 
The trustee tax rate change is included in the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill.
 
In an acknowledgement that the 39% tax rate may result in over taxation when the beneficiaries of the trust have personal tax rates below 39%, commentary on the Bill notes there are options available to trustees.
 
Current law allows settlors and beneficiaries on lower personal tax rates to mitigate over taxation. The income of a trust can be taxed at a beneficiary’s personal tax rate if the income is paid or allocated to the beneficiary as beneficiary income.
 
Special rules are proposed for certain trusts settled for disabled people to allow trustee income to be taxed at the disabled beneficiary’s personal tax rate.
 
In the situation where a deceased person’s affairs are still being settled, the estate (which is taxed as a trust) may be unable to allocate income to beneficiaries as beneficiary income. Special rules for estates are proposed to allow trustee income to be taxed at the deceased’s personal tax rates for 12 months to help address this.
 
Other key changes
Another change is that beneficiary income received by certain close company beneficiaries will not be taxed as beneficiary income in the company but will instead be treated as trustee income with tax paid at the trustee rate.  This is to prevent trust distributions being made to a company taxed at 28% to circumvent the higher trust tax rate.

 
How can we help?
The change in the trustee tax rate is effective from 1 April 2024 which means there is a window of opportunity to plan now to minimize some of the impacts the rate change will have.
 
For the many businesses operating through company structures with shares owned by trusts it will be prudent to consider dividends prior to 1 April 2024. This may require careful cashflow planning for the payment of dividend withholding tax and provisional tax which may be required to be paid earlier than usual to facilitate this.
 
PIE investments which are capped at a maximum tax rate of 28% may be an alternative investment option to consider now that the differential between 28% and the new trustee tax rate 39% will be significant.
 
Your ownership structures should be reviewed from time to time to ensure these are still fit or purpose depending on your needs and future plans.
 
Ensure you discuss these issues with your trusted Moore Markhams Advisor and begin mapping out a tax strategy to ensure you have considered your options prior to the trustee tax rate change.
 
This information is of a general nature only and is not professional advice.