Key changes to the trustee tax rate
From 1 April 2024, the trustee tax rate increased from 33% to 39%, aligning it with the top personal tax rate. The exception to this is trusts earning $10,000 or less in a tax year (after deductions and before losses brought forward), which will still be taxed at 33%.
With the company tax rate at 28%, holding investment assets in a trust appears less beneficial than a company. However, it’s important to be mindful of the limitations of owning assets this way. Company profits distributed to shareholders - especially if the shareholder is a trust - may still be taxed at 39%, minus any imputation credits. This means that while companies offer a short-term tax advantage, the long-term picture depends on how profits are distributed.
Understanding PIEs
Portfolio investment entities (PIEs) are often seen as appealing investment models, thanks to their top tax rate of 28%.
“There may be more of an incentive for people to put income-generating assets into a company structure rather than a trust structure,” says Alan Scott, BDO Tax Partner. However, he notes it’s important to not push the boundaries too far when restructuring assets out of trust.
There are important considerations to be made for trusts investing in PIEs. For example, if a trust invests in a PIE and selects the 28% Prescribed Investor Rate (PIR), that income becomes excluded income - meaning it can’t be distributed to beneficiaries. Instead, they may wish to choose a lower PIR (like 17.5%) to allow the income to be taxable to the trust and can be distributed to beneficiaries that may be sitting on a lower tax rate than 28%.
Benefits of using trusts
Despite the tax rate changes, many people see benefits in using trusts, especially when it comes to preserving family wealth. Trusts still offer flexibility; income can be retained and taxed at 39% or distributed to beneficiaries and taxed at their marginal rates. Distributions must actually take place, and beneficiaries have the right to know about those distributions.
“Trusts are still a very good vehicle for asset protection and for the management of intergenerational wealth, when you're trying to pass wealth that you've generated down to your children or their grandchildren,” says Iain Craig, BDO Tax Partner.
However, the new Trusts Act and enhanced Inland Revenue disclosure requirements mean proper administration of trusts is more important than ever. Trustees must maintain financial statements, meet disclosure obligations, and carefully consider who their beneficiaries are.
Seeking advice
If you’re navigating the new trustee tax landscape or considering how best to structure your property and land investments, BDO’s tax specialists can help.
Reach out to your local BDO adviser or explore more insights in our Taxflix series.
