New Zealand’s recent increase in the trust tax rate is likely to result in many farming trusts being overtaxed, Perpetual Guardian’s David Boyce says.
On April 1, the tax rate payable by trustees on income earned was lifted from 33% to 39% under new legislation.
Boyce says the impact of the legislation – which he describes as “rushed through” – is that all trustee income earned over $10,000 will be taxed at 39%, whereas individuals pay tax at 10.5% on their first $14,500, with brackets in place that increase tax until they reach $180,000, when the 39% threshold starts.
“While the intent of the law change was to target trusts with income over $180,000, we believe a large number of trusts will have income below the $180,000 threshold,” says Boyce, Perpetual Guardian’s national development manager.
“My view is probably that the change is likely to result in a general overtaxing of trusts that earn income between $10,000 and $180,000 a year, which is pretty much ballpark for many farming businesses.”
Trustees should be aware that they may be eligible for a ‘clawback’, Boyce says.
“So, someone that has income allocated to them from a trust, where the trust has paid tax at 39%, but their personal tax rate is only 17.5%, then there’s a major refund due in respect to the overpayment of the trustees.”
Farming operations owned in a trust, either directly or via shares in a private farming company, may be faced with a higher tax liability, he says.
“That means trustees may need to hold a larger cash balance to meet terminal tax requirements, and in some cases make larger provisional tax payments.”
He recommends trustees with concerns should seek expert advice.
“The need for a trust for succession and estate planning, as well as asset protection purposes, will still remain a viable structure for ownership of the farm.
“However, my recommendation is that trustees contact their tax adviser to discuss the changes and what impact this may have on the beneficiaries.”
Hear David Boyce discuss farm succession and estate planning on the latest Federated Farmers Podcast episode – fedfarm.org.nz/podcast
Federated Farmers, New Zealand’s leading independent rural advocacy organisation, has established a news and insights partnership with AgriHQ, the country’s leading rural publisher, to give the farmers of New Zealand a more informed, united and stronger voice. Federated Farmers news and commentary appears each week in its own section of the Farmers Weekly print edition and online.
