Budget summary for small business owners with Trusts in 2024

What does the tax change mean for you?

From the beginning of the 2024/25 income year (April 1, 2024), New Zealand will see an increase in the tax rate for trustee income from 33% to 39%, aligning it with the top personal tax rate. Here’s a breakdown of what this means and some steps you might consider.

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Concessions to note:

• Small Trusts: Trusts earning up to $10,000 in net trustee income annually will continue to be taxed at the existing rate of 33%.

• Estates: For the year of death and the following three years, estates will also enjoy a 33% tax rate before transitioning to 39%.

• Special Trusts: Trusts with disabled beneficiaries, energy consumer trusts, and legacy superannuation funds will remain taxed at 33%.

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Smart moves to consider:

To navigate these changes without falling into the trap of tax avoidance, consider the following:

• Dividend adjustments: Trust-owned companies might adjust their dividend policies, perhaps accelerating dividends before the new tax rate kicks in or reducing them afterward.

• Income distribution: Spread the trust income among beneficiaries who fall into lower tax brackets.

• Strategic structuring: Moving assets to a newly formed company taxed at 28% or winding up the trust entirely could be beneficial.

• Smart investments: Consider putting money into Portfolio Investment Entities (PIEs), which have a maximum tax rate of 28%.

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Red flags to avoid:

Inland Revenue will be keeping a close eye on certain activities that might hint at tax avoidance:

• Questionable resettlements: Shifting income to lower-taxed beneficiaries who then transfer it back.

• Uninformed beneficiaries: Distributing income to beneficiaries without their knowledge or expectation.

• Artificial financial structures: Replacing dividends with non-genuine loans or manipulating the timing of payments to alter tax liabilities.

• Unrealistic transactions: Engaging in financial transactions that don’t reflect true business needs, such as inflated interest or dividends between related entities.

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It's crucial for small business owners to review their trust arrangements and adapt to these new regulations. Ensure you're well-informed and compliant to avoid any issues with Inland Revenue.

Need a hand? If you're unsure about how these changes affect you or need help adjusting your strategy, don't hesitate to reach out. We're here to help you navigate these changes smoothly and keep your business thriving.