On Monday 11 March, the Finance and Expenditure Committee (“FEC”) released its report on the tax Bill that includes the proposed increase in the trustee tax rate to 39%. The FEC has recommended several changes to the implementation of the 39% trustee tax rate, proposed concessions from it, and anti-avoidance measures.

FEC recommendations on the Trustee tax rate increase

Tax threshold

The FEC has recommended that the increase in the trustee tax rate to 39% from 1 April 2024 proceed. However, the FEC has recommended that some trusts, referred to as de minimis trusts, should remain subject to tax at 33%.

This is intended to address concerns that a 39% trustee tax rate would result in many trusts being over-taxed as their beneficiaries are not subject to the top personal tax rate of 39%.

Disappointedly, the threshold to be taxed at 33% is set at only $10,000 of net income for the year and once that threshold is crossed all trustee income is taxed at 39%.

Submissions in relation to having a two-tax rate approach had suggested a threshold of $100,000 of net income before the 39% rate was applied. The FEC recommended this substantially lower threshold as it was concerned that a $6,000 tax saving could incentivise taxpayers to establish multiple trusts and split income-earning assets between them.

Deceased estates and disabled beneficiary trusts

The FEC also recommended changes to the proposed concessions for deceased estates and disabled beneficiary trusts.

The original concessions were rather complex requiring the trustee income to be combined with that of the disabled beneficiary or deceased individual and taxed at personal marginal tax rates. The FEC proposal simplifies these concessions.

The trustee income of a deceased estate will be taxed at the existing 33% trustee tax rate in the income year of the individual’s death and the following three income years. If the estate is still in existence after this time, trustee income will be taxed at 39%.

Similarly, the trustee income of a disabled beneficiary trust will be taxed at the existing 33% trustee tax rate.

A disabled beneficiary trust can now have more than one disabled beneficiary and the definition of who qualifies as a disabled beneficiary has widened.

To qualify as a disabled beneficiary trust, a trust must have one or more disabled beneficiaries and no person, other than a disabled beneficiary, may ever receive a distribution from the trust, except the dissolution of the trust if there is no living disabled beneficiary.

A disabled beneficiary is a person who receives one or more of the following:

• A supported living payment on the grounds of restricted work capacity.

• A child disability allowance.

• Jobseeker support on the grounds of health condition, injury, or disability.

• A disability allowance.

Anti-avoidance measures

The FEC has also proposed tightening the anti-avoidance measure around making beneficiary income distributions to a close company.

When trustees allocate beneficiary income to certain close companies, that beneficiary income will be taxed at the trustee rate of 39% rather than the company rate of 28%. From the company’s perspective, the distribution will be treated as a capital gain and only available for tax-free distribution to shareholders on liquidation of the company.

This rule will apply where a trustee distributes beneficiary income to a close company whose shareholders include one or more of the following:

• A settlor of the trust.

• The trustees of the trust.

• A person for whom a settlor of the trust has natural love and affection.

• The trustees of another trust, if a settlor of the distributing trust has natural love and affection for a settlor or a beneficiary of that second trust.

What you can do

If you have a trust, or wondering if the trust is right for you, then it’s important to consider how the changes to the trustee tax rate, associated concessions and anti-avoidance measures will impact you. The best way to do this is to speak to your Findex Tax Advisor.

Findex Group Limited, trading as Findex.

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18 March 2024