Tax rules for trusts are changing: What do I need to know?

Attention all trustees!

Starting from the 1^st April 2024, there’s going to be a change to the way Trusts are taxed in New Zealand – with the income tax rate for Trusts increasing from 33% to 39%.  

If you’re likely to be impacted by the change, here’s a quick rundown of what you need to know.

Why is the Government making this change?

Essentially, they needed to close a pretty major loophole in the tax net that was being exploited by certain high-income earners.

That loophole came about in 2021, after the top individual tax rate was hiked from 33% to 39%, to be applied to every dollar earned over $180,000.

This prompted lots of big earners to move their income across to Trusts, where they could still nab a 33% tax rate – and save themselves a packet.

All up, IRD data shows there was about a 50% increase in collective Trust income after the new, higher individual tax rate was introduced.

Are there any exceptions to the new rule?

As with most things Trust-related, there are some complexities. Here are a couple of instances where you may be exempt from the new rule.

Beneficiaries

If all income earned by the Trust is distributed to its beneficiaries, tax will instead be calculated at the beneficiaries’ individual marginal tax rates. If you already do this, then no change applies.

PIE tax

Where the Trust invests in PIE tax-based products, this may help to minimise tax to 28%. This will depend, however, on how Trust expenses are accounted for and whether the Trust is making distributions. 

What does this mean for me and my Squirrel investments?

Now, at Squirrel, we’re no tax experts. If you invest with us by way of a Trust, or you hold rental properties via a Trust in some way, we’d always recommend you seek advice from an expert on what these changes mean for you.

But if you are affected by the new Trust income tax laws, and need to make some changes to how you manage your money with us as a result, here’s what you need to know:  

1. If you think you may benefit from using the PIE tax based Squirrel Monthly Income Fund, book a meeting with our team here.

2. If you need to update the tax rate used on your Trust, there are a couple of ways you can go about it:
   1. Log into your Squirrel account > Choose Settings (top right corner) > Investment account > Select the pencil, and edit your tax rate
   2. Give us a call or email us on money@squirrel.co.nz with the details of the update you need.

The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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