One of the most predicted changes the Budget introduced was a change to the trustee tax rate. As soon as the top marginal income tax rate increased to 39%, it was a forgone conclusion the Government would alter the trustee tax rate too. The only matter the jury was out on, was the timing. Clarification is now to hand. As of 1 April 2024 the trustee tax rate will move from its current level of 33% to 39% in New Zealand, thereby ensuring alignment between the top personal income tax rate and the trustee tax rate.
Trusts income have been taxed at the current rate of 33% since 1989. Undoubtedly, upon the top personal income tax rate increasing to 39%, some people would have chosen to channel income through trusts on the basis a tax savings of 6% was enabled. That said, given the cost to establish and administer a trust, it’s doubtful any dramatic increase in the use of trusts solely to mitigate against paying tax at the highest income tax rate occurred.
Inland Revenue believe only a small number of trusts will be affected by the new trustee tax rate. This is unlikely to give much comfort to Trustees who have historically chosen to retain income within a trust as now they’ll pay tax on such retained income at 39% as opposed to 33%. This may force trustees hands, inducing them to regularly distribute income to beneficiaries to access lower tax rates. This in itself may be inconsistent with a trust’s objective. It could be imprudent in certain circumstances too.
On 30 August 2023 the National Party revealed the tax policies it will implement should it win the elections in October 2023. No mention was made of a reversal of the increase trustee tax rate at the time of the Party’s policy announcements. Given this, we have considered steps clients should contemplate prior to the introduction of the increased trustee tax rate.
Declare Dividends Before 1 April 2024
Where a company’s shares are owned by a Trust, directors may consider declaring and paying fully imputed dividends to the Trust before 31 March 2024. This will permit a tax saving of 6% to be achieved by the trust. All dividends paid after this date will still have imputation credits of 28% and dividend withholding tax of 5% paid thereon. The additional 6% will be payable by the Trust incrementally if they retain the income as Trustee Income. There are transitional rules in place for the first 2 years to prevent penalties and interest on provisional tax if the full additional amount related to the Trust rate change is paid by the 3rd provisional tax instalment.
Before dividends are declared, directors should consider the following:
1 - The company’s imputation credit account should be checked to ensure adequate imputation credits exist.
2 - In cases where a company does not have enough imputation credits to attach to the intended dividend, directors should consider bringing forward the company’s provisional tax payment and paying the tax that would ordinarily be due for payment on 7 May 2024 in March 2024. This will ensure sufficient imputation credits exist to pay the fully imputed dividend thus avoiding overdrawing the company’s imputation credit account.
3 - Because dividend withholding tax must be paid by the 20th of the month following the date the dividend is declared, directors should consider the cash flow effect this will have on the company before declaring the dividend.
Please do not hesitate to contact us if you wish to discuss declaring a dividend to achieve the 6% tax saving.
To assist clients in this respect, two client seminars canvassing (amongst other matters) the effect the new increased trustee tax rate could have on structures will be held in November 2023. Clients are recommended to contact their Greenlion advisor to confirm their attendance as there may be only a small window of opportunity in which steps can be taken to achieve a possible favourable tax outcome. Spaces will be limited at these events. Should you wish to attend, please contact your Greenlion advisor to confirm your attendance.
As you may be aware, on 30 March 2022 a new set of rules around GST tax invoices came into effect. The purpose of this was to simplify GST record keeping. This meant tax invoices no longer remained an absolute necessity when submitting expense claims, with the exception of sellers. It also removed the requirement to gain IRD's approval when issuing buyer-created tax invoices.
Further to this, the Government are now introducing further changes. These are coming into effect on 31st March 2023. Some of the changes include:
For a full list of the changes occurring please feel free to get in touch with your Greenlion business advisor.
New Reporting Regime
Now that we are completing Financial Statements and Tax Returns for clients for the 2022 financial year it’s appropriate to remind you of the increased scrutiny Trusts are receiving from the Commissioner of Inland Revenue Department (IRD). We informed you this would occur back in October 2021.
Under the new reporting regime established by Operational Statement OS22/02, all Trusts in New Zealand that derive assessable income must file tax returns and satisfy the new disclosure rules.
These rules are applicable from the commencement of the 2021/2022 tax year
Some exceptions exist. For instance, non-active complying trusts that do not file tax returns are not subject to the new reporting requirements. It is compulsory however for these Trusts to file a declaration to this effect.
The purpose behind the new reporting measures is to gain information in relation to the use and working of trust structures. This insight includes understanding how the top personal tax rate of 39% works in relation to the Trust income rate of 33%.
New Information Requirements
Other than preparing detailed financial statements, the following information will now need to be provided to the IRD:
Whilst the new reporting standards are applicable for the 2021/2022 year, the IRD does have the power to request the above information be provided for from 1 April 2014 should it so wish.
The new reporting regime brings to bear increased scrutiny on Trusts, reinforcing the need for Trustees to satisfy their legislative duties. Satisfactorily documenting Annual Trustee Meetings and substantiating those transactions record in financial statements by way of Trustee Resolutions, Loan Agreements, Acknowledgments of Debt and Gifting (where appropriate) will be vital in proving Trustees are compliant with statutory requirements.
What Trustees Should Do Now
Trustees will undoubtedly appreciate appropriately documenting transactions and collecting and communicating requisite information to IRD will involve additional time spent. For this reason, an increase in fees is to be expected. Those front footed Trustees who work closely with their Greenlion Accountant and the Trustee Services Division are likely to benefit from time efficiencies and thus incur less cost. For this reason, we ask Trustees to become involved in the process by providing us with the information we need in a timely manner and ensuring your Financial Statements are backed with appropriate Trust documentation.
Should you wish to discuss your Trust requirements this year, be sure to contact your Greenlion Advisor and the Trustee Services Division by clicking on this link. We’re happy to assist.