The Government is cracking the whip on the “unfairness” in Aotearoa’s tax system, announcing an increase in the trustee tax rate.
Minister of Revenue David Parker said the trustee tax rate will be in line with the top personal tax rate of 39 percent from April next year.
The hike from 33 percent to 39 percent in the trustee tax rate is in a bid to improve “the fairness of the tax system”.
In 2021, the Government introduced the 39 percent top personal tax rate.
Minister Parker said Inland Revenue (IRD) and Treasury at the time recommended aligining the trustee rate to match the personal tax rate.
Minister Parker said at the time if analysis proved high income earners were circumventing the personal income tax rate through greater uses of trusts, ministers would be eager to move and address the issue.
He said on Thursday new informaiton from IRD shows an almost 50 percent climb in income subject to the trustee rate, from $11.4 billion in the 2020 tax year to $17.1 billion in 2021.
“Misalignment between the 33 percent trustee rate and the 39 percent top personal rate allows taxpayers to circumvent the top personal rate and reduces the progressivity and fairness of the income tax system.”
Minister Parker said the increase in the trustee rate is a step “towards righting that unfairness”.
“Only a small proportion of trusts will pay most of the additional tax. The top five percent of trusts with some taxable income in the 2021 tax year accounted for 78 percent of all trustee income ($13.3 billion out of $17.1 billion). This is estimated to raise approximately $350 million per year,” he said.
The Minister said the increase is in response to IRD’s High Wealth Individuals report.
“There is a large difference between the average tax rate ordinary New Zealanders pay on their full income compared to the super-wealthy,” Minister Parker said.
“The report also shows that a substantial number of the super-wealthy funnel their income through trusts which minimises their tax bill. This change remedies that.”
He said Aotearoa is an “international outlier” in taxing trustee income below the top personal tax rate.
“Australia, Canada, the United Kingdom, and the United States have broadly comparable tax regimes and trust laws to New Zealand – they all align their trustee tax rates with their top personal tax rates.”
He said the Government is proposing targeted measures to ensure trusts are not over taxed in situations, such as deceased estates and trusts for disabled persons.
“To allow trustee income of an eligible trust to be taxed as though it is the income of deceased person or the disabled beneficiary of the trust.”