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A Simple Guide to the 39% Trust Tax Rate in NZ
For those concerned about trust tax rates in NZ, the big news for anyone with a trust in New Zealand is the new trustee tax rate: it’s jumped from 33% up to 39% from 1 April 2024. This isn’t just a minor tweak; it’s a significant shift that changes the game for how trustees, business owners, and property investors need to think about their trust’s income.
Understanding the New 39% Trust Tax Rate
So, why the change? The government’s main goal was to align the trust tax rate with the top personal income tax rate, also 39%. The idea is to make the tax system a bit fairer and prevent trusts from being used simply to get a lower tax rate on high levels of income.
Think of it this way: your trust now plays by the same top-end tax rules as a high-income individual. Any profit the trust earns and doesn’t pass on to its beneficiaries gets hit with this flat 39% rate. It’s a completely different approach from the tiered system we see with personal taxes, which you can read about in our simple guide to NZ marginal tax rates.
To put this change into perspective, here’s a quick look at the old versus new rates.
NZ Trust Tax Rates at a Glance
| Tax Category | Previous Tax Rate | Current Tax Rate |
|---|---|---|
| Main Trustee Income Rate | 33% | 39% |
| De Minimis Threshold | N/A | 33% |
This table clearly shows the jump to 39%, but also highlights the new ‘de minimis‘ threshold, which is a crucial exception to the rule.
Who Is Most Affected?
This change really hits trusts that tend to hold onto their earnings instead of paying them out to beneficiaries. If your family trust brings in rental income and you decide to keep that cash in the trust for reinvestment, that entire profit is now taxed at the new 39% rate.
But, there’s a small silver lining for smaller trusts.
The government introduced a ‘de minimis’ threshold. If your trust earns less than $10,000 of trustee income in a year, you can still use the old 33% tax rate. This is a welcome bit of relief for trusts with more modest earnings.
Trustee Income vs Beneficiary Income
Getting your head around the difference between trustee income and beneficiary income is the absolute key to managing a trust smartly. This is especially true now we’re dealing with the new 39% trust tax rate in NZ.
Think of your trust like a holding pot for money. Any income the trust earns that is left sitting in that pot at the end of the financial year is called trustee income. That leftover profit gets hit with the flat 39% trustee tax rate.
But here’s the clever part. If you decide to pass that income out of the pot and give it to a beneficiary before the financial year ticks over, it becomes beneficiary income. This money is then taxed at the beneficiary’s own personal income tax rate, which can often be a whole lot lower than 39%.
How Income Distribution Saves Tax
At its heart, the strategy is simple. You’re just moving income from a high-tax environment (the trust) to a lower-tax one (the beneficiary). It’s a completely legitimate and standard way to handle a trust’s tax bill.
By allocating income to beneficiaries, you can make use of their lower marginal tax rates. For instance, a beneficiary with no other income could receive up to $14,000 completely tax-free, or get up to $48,000 and pay tax at just 17.5%. The savings compared to the flat 39% trust rate can be massive.
Let’s look at a practical example. Imagine a family trust earns $40,000 in rental profit.
- Scenario 1 (No Distribution): If the trust keeps all the money, it pays tax at 39%. The tax bill would be $15,600 ($40,000 x 0.39).
- Scenario 2 (Smart Distribution): The trust distributes $20,000 to an adult child at university with no other job. The trust pays 39% on its remaining $20,000 ($7,800 tax). The student pays tax on their $20,000 at their personal rate, which is just $2,330. The total tax paid is $10,130.
That’s a tax saving of $5,470 right there. This does take a bit of planning and the right paperwork, but the potential tax savings are significant. If you’re not sure how to structure these distributions, our team at Business Like NZ Ltd are the affordable, down-to-earth chartered accountants supporting Auckland businesses and property investors.
How Different Income Sources Are Taxed
Not all income flowing into your trust gets treated the same by the IRD. For an Auckland business owner or property investor, getting your head around these differences is the key to making your trust work for you, especially now that the main trustee tax rate is a hefty 39%.
Let’s break down the common ways a trust makes money and how the tax works for each.
Rental and Business Profits
This is the bread and butter for many trusts. Whether it’s rent from your investment properties or profit from a business the trust owns, the tax treatment is pretty straightforward.
If you leave that money in the trust at the end of the financial year, it gets taxed at the flat trustee rate of 39%.
But, if you pay that income out to an adult beneficiary, it’s then taxed at their personal marginal rate. This is a go-to strategy for property investors trying to manage their tax bill. For a deeper dive on this, check out our guide on personal vs trust ownership for rentals. It’s also worth being aware of the general real estate investment tax benefits available.
PIE Funds and Investments
Now, this is where things get interesting. Income from Portfolio Investment Entities (PIEs) is a special case and a massive win for trusts.
Even if the trust holds onto the PIE income, it’s taxed at a maximum rate of 28%. That’s the top prescribed investor rate (PIR), not the much higher 39% trustee rate.
This makes PIE funds an incredibly tax-smart way for trusts to hold investments. That 11% gap between the 28% PIE rate and the 39% trustee rate adds up to serious savings over time, letting your trust’s capital grow much faster.
Learn more: Tax Efficient Investing: Capping Your Tax Rate at 28%
To give you a clearer picture, here’s a quick summary of how different income types are handled.
Tax Treatment of Common Trust Income
| Income Source | Taxed To Trustee If Retained | Taxed To Beneficiary If Distributed | Key Considerations |
|---|---|---|---|
| Rental Income | Yes, at 39%. | Yes, at their personal tax rate. | Standard income, distributions are a key tax planning tool. |
| Business Profit | Yes, at 39%. | Yes, at their personal tax rate. | Same rules as rental income apply. |
| PIE Income | Yes, but capped at 28%. | Tax is already paid at the PIE level. | Very tax-efficient for long-term investment growth within the trust. |
| Bright-Line Gain | Yes, at 39%. | Can be complex; often taxed within the trust. | This is treated as income, not a tax-free capital gain. |
As you can see, the source of the income really matters.
Capital Gains and the Bright-Line Test
We don’t have a broad capital gains tax in New Zealand, but don’t get too comfortable. For property investors, the bright-line property rule acts just like one.
If your trust sells a residential property within a specific period (it’s 10 years for most properties bought before July 2024), any profit is usually treated as taxable income.
That gain gets hit with the standard 39% trustee tax rate if the money stays in the trust. This makes timing your property sales absolutely critical.
Real-World Examples of NZ Trust Tax Rates in Action
It’s one thing to talk about tax rates in theory, but seeing the numbers play out is what really brings the impact of the 39% trust tax rate home. Let’s walk through a couple of common scenarios you might see as an Auckland business owner or investor.
The Property Investor Trust
Picture a family trust that owns a few rental properties. After all expenses, it has a net profit of $50,000 for the year.
Here are two ways that could be handled:
- Option 1: The Trust Keeps the Profit. If the trustees decide to hold onto the entire $50,000, the tax calculation is straightforward: $50,000 x 39% = $19,500. A hefty tax bill.
- Option 2: Distribute the Profit. Instead, the trustees distribute the income, giving $25,000 to each of two adult beneficiaries who have no other income. Each beneficiary is taxed at their own personal rate on that $25,000, which works out to just $2,830 each. The total tax paid across both is only $5,660.
In this scenario, a simple distribution saves the family $13,840 in tax for the year. It’s a massive difference.
The Small Business Owner’s Trust
Now let’s think about a trust that receives an $80,000 dividend from the family’s operating company. The business owner needs this money to cover their personal living costs.
If that $80,000 is simply left sitting in the trust, it gets hit with a $31,200 tax bill ($80,000 x 39%). That leaves just $48,800 in cash. But by formally distributing that dividend to the business owner as beneficiary income, it’s taxed at their personal rate instead, keeping far more of that hard-earned cash in their pocket for household expenses.
These examples really highlight just how critical your distribution strategy is. It’s not just paperwork; it’s about making smart decisions that can have a huge financial impact.
Navigating these rules can feel a bit overwhelming. For practical, down-to-earth advice, remember that Business Like NZ Ltd are the affordable, chartered accountants supporting Auckland businesses and property investors.
Getting Around the Trust Tax Rates in NZ
While passing income out to beneficiaries is a smart way to manage a trust’s tax bill, it’s not a free-for-all. The IRD has put some specific rules in place to stop people from taking advantage, and you need to know what they are before you start making payments.
Getting these rules wrong can unwind all your good tax planning and land you in hot water. Two big ones that trip people up are payments to kids and payments to beneficiaries living overseas.
The Problem with Payments to Children
At first glance, distributing income to your children seems like a no-brainer. They’re on low personal tax rates, so it looks like an easy way to slash the trust’s tax liability. But, as you’d expect, there’s a catch.
It’s called the minor beneficiary rule.
This rule essentially says that any income a trust pays to a child under 16 gets taxed at the trustee rate of 39%, not the child’s lower personal rate.
The whole point of this rule is to prevent trusts from being used simply to splinter income among young family members to get a better tax outcome. There is one small exception, though: you can distribute up to $1,000 to each child, and that small amount will be taxed at their own rate. Anything over that gets hit with the 39% trustee tax.
Managing Your Annual Trust Compliance
Running a trust well is about more than just smart tax planning; it’s about diligent, year-round administration. A cornerstone of this is filing the annual IR6 tax return with the IRD. This is your formal report detailing the trust’s income for the year and any distributions passed on to beneficiaries.
Increased Disclosure and Record-Keeping
In recent years, the IRD has ramped up its disclosure requirements, and they’re asking for a lot more detail. Trustees are now expected to provide a full set of financial statements and give a clearer picture of settlements and distributions.
What this means for you is that good record-keeping has gone from being a helpful habit to a non-negotiable requirement.
Think of it this way: keeping organised, detailed records of every transaction is the single best thing you can do to make your annual compliance a smooth, stress-free process. This means tracking every dollar of income and every expense, as well as documenting all distributions and trustee decisions as they happen.
This level of detail ensures you can accurately report on the trust’s financial life and meet the IRD’s higher standards. For a wider view of what’s needed at tax time, it can be useful to look over a small business tax preparation checklist for extra guidance.
Feeling a bit overwhelmed? Staying on top of these obligations is a big job, but you don’t have to do it alone. Our specialised family trust accounting services are designed to take the pressure off and keep things simple.
Get Affordable Help with Your Trust
That new 39% trust tax rate has really thrown a spanner in the works for a lot of people. It’s a sharp reminder that getting your trust’s tax affairs right is more critical than ever.
While the rules can feel like a maze of trustee vs. beneficiary income, it’s nothing you can’t get on top of with the right help. Going it alone, however, can easily lead to mistakes that cost you far more than a bit of good advice would have.
At Business Like NZ Ltd, we’re the affordable, down-to-earth chartered accountants that Auckland businesses and property investors trust. Our job is to turn complex tax rules into simple, practical steps that save you money and headaches. There’s no need to face the new trust tax rates by yourself.
Let us help you make sure your trust is set up and run as efficiently as possible. That way, you can get back to focusing on what you do best, knowing the compliance side of things is sorted.
Ready to make your trust work smarter for you? Get in touch with us at Business Like NZ Ltd for a no-obligation chat about how we can help. As affordable, down-to-earth chartered accountants, we’re here to support Auckland businesses and property investors every step of the way. Contact us here.
