Changes to the tax treatment for trusts in New Zealand

As of April 1, 2024, the New Zealand government is introducing an increase to the trustee tax rate from 33% to 39%*, aligning the trustee tax rate with the top personal tax rate. 

This adjustment is expected to generate approximately $350 million annually, totalling $1.1 billion over the forecast period. In the 2020–21 income year, out of 177,000 trusts, 9,000 (5%) will be impacted, which accounts for 78% of trustee income (Inland Revenue, May 2023).

The current situation

Currently, when a company pays dividends, it deducts a withholding tax of 33% from the shareholder (including trusts) entitlement. This tax rate has not changed since 1989, despite introducing the 39% top personal tax rate in 2021. 

What’s changing, and how may Trusts respond? 

Trustees who have historically retained income within a trust will shortly face an additional 6% tax burden, bringing the total tax rate on retained income to 39%. 

This shift may compel companies to pay a dividend before the new tax rate takes effect, in order for trustee shareholders to benefit from the current lower dividend withholding tax rate. 

Trusts holding company shares

For trusts that own shares in a company, a proactive approach may be warranted. Directors of such companies may consider declaring and paying fully imputed dividends to the trust before the proposed changes take effect on 1 April 2024, in order to capitalise on the existing lower trustee tax rate.

So what should I/my accountant do?

It’s advisable to seek independent financial advice on the best actions required for you and your Trust’s specific circumstances.

Janet Xuccoa from Greenlion Limited has said that 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.

Read more on what Janet from Greenlion has shared with Directors and Trustees on considerations of the new trustee tax rate.

How can Orchestra help?

An efficient way to calculate, create and send dividend statements will save you time.

Because Orchestra is equipped to act as your compliant and accurate share register, the platform automatically calculates dividend distribution amounts per shareholder, including trusts. Professional dividend statements are then generated and published for each shareholder into their shareholder portal. 

Orchestra can factor in scenarios where a shareholder is RWT (resident withholding tax) exempt, or where a non-resident is paid a supplementary dividend.

For an understanding of how dividend statements work in Orchestra, get in touch with our team or visit this page for more information.

*A more detailed explanation of the new 39% trustee tax rate change and implications is provided in this article from Robyn Walker (Tax Partner - Deloitte).