As part of Budget 2023, the previous Labour Government announced that they would increase the Trust income tax rate from 33% to 39% with effect from 2024-25 and later income years.

This change was included in a Tax Bill but was not passed prior to Parliament dissolving for the election, therefore, it lapsed.  Now with a change in Government, everyone has been waiting eagerly to find out whether the new Coalition Government would re-introduce the Tax Bill.  Up until recently there had been no commentary from the Coalition Government, including prior to the election, as to whether they would proceed with the Trust tax rate increase.

The Coalition Government announced yesterday that they will proceed with increasing the Trust tax rate to 39% from the 2024-25 and later income years.  This now gives taxpayers and their advisers certainty prior to the change taking effect, but gives very little time to implement any necessary changes beforehand.

There had previously been discussion about a tiered tax rate being introduced for Trusts as part of this change.  Data obtained by Chartered Accountants Australia New Zealand (CAANZ) from Inland Revenue showed that increasing the rate to 39% would result in 89% of all trusts being overtaxed.  This shows there is rationale for having tiered tax rates for trusts.

However the tiered tax rate argument has largely fallen on deaf ears, which is disappointing.  If a trust has taxable income of $10,000 or less then this will still be taxed at 33% whereas a trust with taxable income of more than $10,000 will have all its income taxed at a flat rate of 39%.  In essence, we now have two tax rates for trusts rather than a tiered tax rate.

The increase in tax rate is something that all trustees need to consider in determining whether income previously retained in a Trust should now be allocated to an individual on a tax rate lower than 39%, or whether there will be an extra 6% tax payable.  However, allocating income to a beneficiary needs to be balanced against the fact this will create wealth in the beneficiary’s name, which goes against the asset protection purposes of a trust.

Furthermore, companies with trust shareholders also need to consider whether they should be declaring retained earnings, earned up to the income year the tax rate change applies from, as a dividend prior to the increase in the tax rate taking effect.  This would ensure that these dividends are capped at a maximum final tax rate of 33%.  If this is the case then it will result in Dividend Withholding Tax having to be deducted from the dividend and paid to Inland Revenue by 20 April 2024 – this requires consideration as to whether the company is in a position to fund this payment.  It is possible for the dividend to be credited to a shareholder current account rather than paid in cash. 

It is disappointing that we have only got certainty regarding these tax changes so close to the changes being implemented, which is resulting in taxpayers and their advisers scrambling to take appropriate action before the changes take effect..

If you would like to know more about this and how it impacts your situation, please contact your advisor.