Waikato Business News August/September 2023

26 WAIKATO BUSINESS NEWS, AUGUST/SEPTEMBER 2023
Trusts and the 39% tax rate
- is there another solution?
On 18 May 2023, the Taxation (Annual Rates for 2023-23,
Multinational Tax, and Remedial Matters) Bill was introduced
into Parliament. If passed, the Bill will see the income tax
rate for trusts increase from 33% to 39% from the 2024-2025
income tax year, i.e. from 1 April 2024 for trusts that have a
31 March balance date.
The Commentary to the
Bill states:
“Aligning the
trustee and top personal
tax rates at 39% would help
ensure that trusts cannot be
used to circumvent the top
personal tax rate. This would
improve the fairness and progressivity
of the tax system,
protect the revenue base from
erosion, and improve the
Government’s ability to raise
revenue.”
So, it appears the change
in the trust rate is being made
to stop people using trusts to
avoid the top personal tax rate
of 39%. Therefore, the question
becomes, are trusts being
used for this purpose?
My answer to this question
is “no”. Trusts are not being
used for this purpose, but the
way trusts are taxed means
that this can be the outcome.
This distinction is important,
and in my view, why the proposed
39% trust tax rate is
an imperfect solution. While
there may be a policy argument
to support rate alignment,
what’s being proposed
is too blunt and will likely
result in over-taxation.
I’ve been recommending
the use of trusts for almost 20
years for numerous reasons
including:
- asset protection –
both commercial and
matrimonial,
- flexibility,
- succession and survivability,
and
- governance and managing
family relationships.
A company is an interim
taxing vehicle because its profits
are taxed at 28%, and then
taxed again when the profits
are distributed (with a credit
typically available for the tax
paid by the company) to its
shareholders. A company is
a very normal commercial
entity through which to own
and operate a business for
profit. Income is reinvested
and the value of the company
grows over time.
In the same way that
income of a company may
be reinvested to grow a business,
a trust is similar in that
it is often used to grow family
wealth and capital over
time – akin to the family nest
egg. Distributions are made,
but often, the focus is on
strengthening the trust’s balance
sheet for the betterment
of the family e.g. children and
grandchildren.
However, unlike a company,
once income of a trust
is taxed, it is not taxed again.
This is arguably where the
anomaly arises. The solution
of increasing the trustee tax
rate to the top personal tax
rate is too simplistic. There is
an assumption that trustees
will distribute all income to
beneficiaries to make sure the
’right’ amount of tax is paid
but this disregards and undermines
the numerous other
reasons why someone would
want to put their assets and
wealth into a trust.
An alternative change
would be to introduce a trust
imputation credit regime,
where, like a company, trusts
become an interim taxing
vehicle. Tax would be paid
by the trust when income is
derived and at the 33% trust
rate. The trust would record
tax credits based on the tax it
pays, which could be attached
to distributions of income to
individuals and then taxed at
the recipient’s tax rate.
One reason in favour of
this idea is that unlike a ‘natural
person’ (to use the legal
term), a trust cannot eat a
meal, take a holiday or wear
clothes. It cannot consume
the assets it holds, so doesn’t
it make sense that as the value
of those assets are transferred
to its beneficiaries, those distributions
are then taxed
based on their own personal
TAXATION
AND THE LAW
BY HAYDEN FARROW
Tax Partner, PwC
circumstances? Rather than
apply the highest rate of tax
to every dollar a family trust
earns when it is trying to save
and invest assets for the family
to consume at some point
in the future. This option
would solve any concerns of
’circumvention’ of the 39%
personal tax rate.
It’s worth noting that the
Regulatory Impact Assessment
issued with the draft legislation
included the following
comment:
“We also considered other
options to address misalignment
between the trustee tax
rate and the top personal
tax rate, including taxing
trustee income at the principal
settlor’s personal tax
rate, or introducing an imputation-style
system for trusts
(which would ultimately
tax beneficiaries on distributions
of trustee income at
their personal tax rates). An
imputation style system, in
particular, could improve the
long-term robustness and sustainability
of the tax system.
However, both options would
involve fundamental reform
to the taxation of trustee
income. These approaches
would be significantly more
complex to design, implement,
and administer.”
For those of us who have
had to deal with the two, five
and ten year Brightline rules,
interest deductibility for new
builds, residential rental loss
ring-fencing, GST’s change of
use rules and the list goes on -
we know that complexity is not
a valid reason to refrain from
producing new legislation.
I can’t help but wonder if
IRD’s own policy team may
prefer an imputation system
for trusts, ‘robust and sustainable’
are strong words. Consideration
needs to be given to
pausing the change and providing
the resources to consider
other options.
Chantel Booysen joins
management team at JetPark Hotels
At a pivotal time when
there is a growing
demand for in-person
gatherings, JetPark Hotels has
appointed Chantel Booysen as
group business development
manager (Corporate & MICE).
Booysen will play a crucial
role in showcasing JetPark's
refurbished accommodation
and outstanding conference
facilities.
Based in Auckland and
working across JetPark’s
hotels in Mangere, Hamilton
and Rotorua, JetPark Hotels
director of sales and marketing
Angelique van der Merwe
says the team is confident that
Booysen will help take their
business to new heights.
She brings considerable
experience to the JetPark
team, particularly her understanding
of the corporate market,
conferences and events,
which JetPark has identified as
a key area for strategic growth.
"Her track record speaks
volumes about her ability to
forge meaningful relationships
and drive revenue growth,
and we are confident that she
will play a pivotal role in our
continued success,” van der
Merwe says.
“With a career spanning
diverse roles in New Zealand
and overseas, Chantel has had
numerous successful stints
with renowned establishments.
She has not only secured and
nurtured new clients, but also
significantly elevated sales for
these establishments, which
is a testament to her skills in
client acquisition and account
management.”
Her experience in sales,
account management and
marketing equips her with
a solid understanding of the
hospitality sector, and van
der Merwe says she will be an
enormous asset for JetPark
Hotels.
Booysen says one of the
main attractions to the role
was the opportunity to build
relationships with JetPark’s
clients.
“I’ll be looking after multiple
properties, and I have the
privilege of being able to connect
with both new clients,
plus old clients I have met
before,” she says.
"I'm thrilled to be part of
the JetPark family where I
can contribute to the owners’
vision of creating exceptional
experiences for their clients.
What excites me most is the
emphasis JetPark places on
building relationships and
their genuine passion for their
guests. I really care about
understanding clients’ needs
first, before providing a suitable
solution. This is where the
JetPark family and I are a great
fit!”
She says JetPark has beautiful
purpose-built conference
facilities that are wellequipped
to cater to both
accommodation and events
and conference needs.
“The location of the hotels
makes so much sense if you’re
running an event and you’ve
got people coming in and
out from the airport. Parking
and travelling time is
reduced – you don’t pay
for parking. Plus we have
a shuttle service from
Auckland airport. And
guests can stay here
while they attend the
conference. It’s a
no-brainer.”