The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (aka the “May 2023 Tax Bill”) has been reported back by the Finance and Expenditure Committee, with a number of recommendations.
The Bill was introduced by the previous Labour Government in May 2023 and reinstated by the Coalition Government following last year’s election.
39% trust tax rate
The National party signaled it would retain the 39% trust tax rate change in the Bill, which is intended to apply from the 2024/25 income year (1 April 2024 for trusts with standard balance dates).
The main concerns raised by submitters on the Bill was the potential for over-taxation of trust income where the beneficiaries were not 39% taxpayers.
The Finance and Expenditure Committee has attempted to deal with this issue via a de minimis rule. If the trust’s total net income (that is, after expenses and distribution of income to beneficiaries) is $10,000 or less, the current 33% trust tax rate will continue to apply. For trusts with net income above the threshold, the new 39% tax rate will apply to all income (not only income exceeding the threshold).
The Finance and Expenditure Committee has also recommended a carveout from the 39% tax rate change for energy consumer trusts, certain widely-held superannuation funds (who cease to become widely-held due to declining numbers of members) and securitisation trust beneficiaries. Current tax rates will continue to apply.
The “concessions” in the Bill for disabled beneficiary trusts and deceased estates have been widened. In particular:
- The definition of a disabled beneficiary has been broadened to include those in receipt of the Jobseeker allowance on health, injury or disability grounds or the disability allowance. Disabled beneficiary trusts can also have multiple disabled beneficiaries. A trust that meets the “disabled beneficiary trust” criteria will be taxed at a flat rate of 33% (instead of at the beneficiaries’ personal tax rates, as originally proposed).
- The concession for deceased estates has been changed to require the estate’s income to be taxed at 33% in the income year of death and the subsequent 3 years (instead of giving trustees the choice to elect to apply the deceased person’s personal tax rate for income derived within 12 months of the person’s death).
Other features, such as the proposed integrity rule to tax income distributed to close-company beneficiaries at 39% are largely unchanged.
A quick take
The proposed $10,000 de minimis is expected to remove around 27,000 trusts (out of an estimated 76,000 trusts that pay tax on trustee income) from being subject to the 39% trustee tax rate.
While a number of submissions argued for a much higher de minimis threshold, concerns around multiple trusts being set up to avoid the 39% trust rate (and potentially the fiscal impact) seems to have won out. (The Officials’ commentary notes that a $10,000 de minimis results in a maximum tax “saving” of $600.)
As a result, there will still be compliance costs and the issue of whether potential over-taxation mitigants are within what Inland Revenue contemplates is reasonable, for many trusts to navigate.
The new exclusions and expansion of the existing carveouts for disabled beneficiary trusts and deceased estates is welcome from a simplicity perspective. The Finance and Expenditure Committee’s recommended changes may result in more tax being paid by such trusts and estates relative to the original proposals in the Bill (if disabled beneficiaries’ or the deceased person’s personal tax rates are lower). However, the changes strike a reasonable balance between simplification and preserving the 33% tax rate status quo.
GloBE rules
The Bill also contains New Zealand’s implementation of the OECD’s Global Minimum Tax proposal (or “GloBE” rules). The key recommendations here are:
- To legislatively confirm the application date of the GloBE rules to give certainty. The income inclusion and under-taxed profits rules will apply from 1 January 2025 with the domestic income inclusion rule applying from 1 January 2026.
- To legislatively clarify that OECD commentary and agreed administrative guidance will override the model GloBE rules, where there are conflicts.
- To allow Inland Revenue to issue tax rulings on the GloBE rules including the commentary and guidance.
Submissions to incorporate the GloBE rules into the Income Tax Act by repetition (rather than by reference to the OECD Model Rules) and to introduce a qualified domestic minimum top-up tax in New Zealand have been rejected.
Other changes
The Finance and Expenditure Committee has recommended a number of changes to the 2023 North Island flood event related tax changes in the Bill. This includes the rollover relief measures for depreciable and revenue account property. Rollover relief will be extended to central and local government buy-outs of affected properties and insurance payouts for land improvements. Taxpayers will also be able to assess whether an item is “uneconomic to repair”, to access rollover relief, rather than requiring a third-party assessment.
Importantly, the Finance and Expenditure Committee has recommended the Government include in its tax policy work programme the development of a framework of “off-the shelf” tax measures for emergency events that can be trigged via regulation. (This was in response to submissions that a number of recent emergency events have required similar tax responses but requiring a legislative response each time creates delays and uncertainty for taxpayers.)
What is not in the reported back Bill
The Coalition Government’s other key tax policies include:
- Reducing the “bright-line” taxing period from 10 to 2 years.
- Re-introducing interest deductibility for residential investment properties, with 80% deductibility for the 2024/25 tax year and 100% deductibility from the 2025/26 tax year.
- Removing tax depreciation for non-residential buildings from the 2024/25 income year.
The reported back Bill does not contain these proposals. We understand that they will be added during the remaining legislative stages of the Bill. So stay tuned.
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