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.
If you’re asking where your slice of the Bread & Butter Budget is, you’re not alone. Primarily, business per se weren’t the recipients of much Budget assistance. Those two thirds of the SME Community polled pre-Budget release certainly didn’t have their expectations dashed. That in itself was hardly surprising, given this was a Budget presented by a Labour Government who traditionally don’t favour the business community.
Undoubtedly, set against a backdrop of economic, social, environmental challenges, underpinned by COVID and disastrous weather events, New Zealand’s Finance Minister had his work cut out. Adopting what Grant Robertson termed ‘a balanced approach’, attempting to find savings and reprioritise spending whilst contemporaneously easing the costs of living, making investments that grow the economy and managing inflation, are no easy tasks. Only time will reveal whether the 2023 Budget manages to achieve these laudable aims.
HERE’S HOW PARTS OF THE $4.8B LOAF WERE DIVVIED UP
COST OF LIVING:
SCIENCE & TECHNOLOGY:
LUCKY CRUST RECIPIENTS
With all Budgets there are winners and losers. Counted amongst this Budget’s crust recipients are families with young children. They’ll be pleased the childcare subsidiary eases their costs. One wonders how effective the spend will be however given difficulties envisaged in procuring places at day care centres. National said it would have paid the funds directly to families, enabling them to allocate money to childcare responsibilities as they saw fit. If demand outstrips supply of day care centres and staffing, this approach may prove sensible.
The same can be said for the $327m spent on free and reduced transport cost. Increase usage of public transport will necessitate extra transportation drivers who are current short on the tracks. That aside, those looking to take up driving seats should find procuring work much easier with the fund allocation in place.
Likewise, increased money supply will make it easier for nurses to enter the workforce. Patients will also be winners through this Budget spend, as nurse-to-patient ratios become less strained. Whether the allowance will be sufficient to alleviate current pressures or to retain skilled healthcare professionals when foreign shores with much larger salaries beckons, only time will tell.
Whilst on the subject of health, those involved in delivering initiatives under the Warmer Kiwi Homes Programme will be pleased that funds allocated should result in their work pipelines becoming full. Consequential savings in the form of monthly reduced power bills should serve to please power consumers too.
Talking of heating, many of those in the construction industry have departed for sunnier places as a result of the sector suffering a downturn recently. Those remaining will be hopeful the Budget spend culminates in building the envisaged 3,000 new state houses. Despite good intentions and gold coin, one does have to question whether the spend will prompt employment of labour as other Government housing schemes haven’t resulted in many bricks nor mortar being laid.
Scientists involved in the likes of health, environment, climate and energy industries should be feeling buoyant at the slice of the loaf they have been fed, as should the gaming sector with the 20% rebate they’ll receive on expenditure. Will these allocations lead to meaningful developments in knowledge and growth in exports. One hopes so.
THOSE LEFT OUT
The groups that predominately missed out on receiving any breadcrumbs in Budget 2023 are those with funds in Trusts, borrowers paying home loans, and the majority of small and medium size business owners.
Anyone working in the Trust arena and those with Trusts can’t have been surprised at the increase made to the Trustee Income Tax Rate from 33% to 39%. It was a foregone conclusion Labour would make this move when it increased the highest marginal income tax rate for individuals to 39% back in April 2021. Will this affect the desirability of Trusts? Doubtful. Asset protection and inheritance transference are the main reasons Trusts are set up these days. Any tax benefit a Trust bestows is the icing on the cake rather than the whole 3 tier cake itself. Will the effect take place on 1 April 2024? Maybe. Remember this change occurred previously, only to be repealed by the National Government that took up residence in Parliament house. That said, should the increased rate prevail, Trustees and Beneficiaries are unlikely to welcome its introduction because it will negatively affect the quantum of funds retained and paid to Beneficiaries.
Despite Government intending to spread its spending over the next four years, it’s hard to see how the Budget won’t be fiscal stimulating. Basic 101 economics tells us Budget spending is likely to have an effect of pushing inflation upwards. This will be transpiring at the same time as the Reserve Bank is hammering hard on the Official Cash Rate door, increasing the internal rate, in a bid to get inflation under control and in its 2-3% box. Mr Orr has already reacted to the Budget, increasing the OCR. Banks have immediately provided their response in the form of increased borrowing rates thereby driving loan repayments up for many. Whether that is the last increase to the OCR we’ll see is anyone’s guess. What is certain however is those with loans repayments to make won’t be happy with this Budget because of the increased financial pressure they’ll experience.
One of the most significant groups hardest hit by Budget 2023 are small and medium size business owners. For sure, this sector missed out of receiving its quota of bread. Certainly, this Budget had done little to ease growing compliance, labour and other running costs businesses face. This was to New Zealand’s detriment. Much could have been done to give a helping hand. A decrease in compliance costs, some relief in the form of accelerated depreciation allowances and potentially a lowering of the company tax rate would have been welcomed. Remember businesses employ people so benefits are consequential – they help a business owner remain in operation and keep people employed.
STRATEGIES TO ASSIST BUSINESS
On the basis Labour’s Budget hasn’t provided, here’s a couple of strategies that may assist businesses facing difficulties and finding the going tough.
Treasury has told New Zealanders we’ll miss the much-touted recession but will suffer inflation and higher interest rates for longer than previously anticipated. Not having to endure a recession is likely to be cold comfort to those facing financial pressures and even less to businesses, many who are occupying Struggle Street right now. In this respect, if you’re a business finding waters choppy, contact us. We’re here to help. This Budget can’t be accused of helping many. Ultimately, for the reasons discussed, the benefits it bestows may be nullified by the increased cost of living we’ll all be contending with. Still … 14 October 2023 isn’t that far away and what one Government decrees, another can override.
As the new Financial Year is well and truly underway, we thought it a good time to remind you of some of the financial benefits available and ensure you're aware of a few key dates ahead.
Do you still have outstanding tax payments due for 2022?
We are able to use a tax intermediary to assist with these payments but the cut off date is fast approaching. You have until Thursday 22 June to request orders for tax payments. If you would like to take advantage of this, please call your Greenlion Advisor as soon as possible.
KiwiSaver - Has the Govt. contributed for you?
Each year the Government will contribute $521.43 into KiwiSaver accounts for all member's provided they have contributed the minimum amount of $1,042.86.
The contribution cut off date for the current KiwiSaver year is Friday 30th June.
If you haven't yet made any contributions, we suggest you make a voluntary contribution before June 30th, to ensure you take advantage of the Government's free offering.
You can make the contribution by using the Pay Tax function in your online banking. Select KiwiSaver member account (KSS) and the date 30 June. Your KiwiSaver provider applies for the contribution after 30 June of each year, with the Government's contribution being deposited by end of August.
IRD Small Business Loans - Is yours still to be paid off?
The Small Business Cashflow Scheme is now 2 years old which means if you took up the loan offering and haven't paid this back, interest will be charged. The interest rate is 3% and the term of the loan is 5 years. To avoid any default fees, please pay it down.
Do you need any further financial assistance due to the impacts of COVID-19?
The COVID-19 Small Business Loans are still available, if you have paid your previous loan back in full. Reapplications are open until Sunday 31 December 2023. Your business or organisation will need to meet all 5 of the following eligibility criteria:
If you think you may eligible and would like to apply, you can do so here.
Yesterday was budget day. We will be putting out some commentary on this next week.
Please do not hesitate to get in touch with your Greenlion Advisor if you have questions on any of the above topics.