Hi there
The recently announced Budget 2023 brings significant changes to tax rates and incentives. One of the headline changes is the increase of the trustee tax rate from 33% to 39%, effectively aligning it with the top marginal tax rate. This change will take effect from the 2024-25 income year (starting 01 April 2024). The decision to raise the trustee tax rate is a response to the Inland Revenue's research on High Wealth Individuals, which revealed a nearly 50% increase in income subject to the trustee rate, from $11.4 billion in 2020 to $17.1 billion in 2021.
The purpose, advised by the government, of raising the trustee tax rate is to improve the fairness of the tax system and prevent high-income earners from circumventing the top personal tax rate. However, certain exemptions will be implemented to ensure that deceased estates and trusts for disabled persons are not subject to the 39% rate. These exemptions will allow eligible trusts to be taxed as though the income belongs to the deceased person or the disabled beneficiary, and trusts with lower tax-rate beneficiaries will still be able to distribute trustee income at the beneficiaries' lower marginal tax rates.
The increase in the trustee tax rate is expected to generate approximately $350 million per year in tax revenue.
What does this mean for you?
The change in rate does not mean that Trusts become inefficient for tax purposes, the ability to distribute to beneficiaries will mean that you can still have potentially more flexibility with than without a Trust. The overarching purpose of the Trust is for asset protection and estate planning and any tax implications will always be secondary.
If you're a business owner with company shares owned by your trust, there's a potential risk regarding the timing of dividend payments. Because the timing of dividends is discretionary, there may be retained earnings that could be distributed to your trust after the rate change takes effect. This means that if you don't pay out dividends on these old profits before the rate change, there will be an additional 6% tax applied. To mitigate this, it's advisable to consider paying out dividends earlier if possible.
We understand that navigating these tax changes and optimising your financial situation can be complex. Therefore, we are pleased to offer a 10-minute quick query call to provide personalised support and answer any questions you may have regarding the trustee tax rate increase or any other related tax matters. To schedule a call, please book in with your Partner below. Alternatively, we can discuss your options with you once your accounts have been prepared at your Annual Accounts Review Meeting.
Budget 2023 brings both challenges and opportunities, and we are here to assist you in making informed financial decisions.