NEW 39% PERSONAL TAX RATE:
From the 1st of April 2021 the top marginal tax rate for individuals is being raised to 39% on income earned over $180,000. With this change there are several things to consider from a tax perspective as company and trust tax rates remain at 28% and 33% respectively. It may seem prudent to setup a trust or leave more profit in your company as a means to lower your overall tax bill. However, the IRD has signaled they will be closely monitoring the establishment of new trusts, movement of funds, and other related activity through the use of increased disclosure requirements on taxpayers and the increased capability of their IT system to carry out analytics to identify behaviour changes. Minister of Revenue, Hon David Parker has stated “If that behaviour becomes apparent, then we’ll move to increase the trust rate to avoid that being used as an avoidance loophole”.
A “tax avoidance arrangement” is an arrangement that has tax avoidance as one of its purposes or effects, the tax effect must be more than merely incidental. If a taxpayer is found to have entered into a tax avoidance arrangement, they are subject to penalties of up to 100% of the shortfall. It is imperative that there are commercial reasons outside of tax minimisation for restructuring involving trusts or companies, and transactions related to them as IRD scrutiny will be particularly high in these areas.
On top of the much publicised re-write of the Trust Act, Inland Revenue (IRD) has issued a recent classification in relation to whom is classified as "settlor" of a trust. Section HC 27 of the Income tax act 2007 states a settlor is a person who "transfers value to the trust, for the benefit of the trust or on terms of the trust".
However, IRD have recently provided definite clarification on this matter. A legislative amendment to HC 27 has been made and a "Commissioner's Operational Position" has been issued.
According to s HC 27(2), a beneficiary who has taken possession and enters into a contract to lend money back to the trust may be deemed a settlor if he or she:
- Contracts to be paid nil or below market-rate interest, or
- Contracts to receive interest but does not make demand for such interest or defers demand, or
- Does not demand repayment of capital.
However, a beneficiary will not become settlor if either:
- The amount owing to them from the trust at the end of the income year is $25,000 or less; or
- The trust pays interest to the beneficiary at a rate equal to or greater than the prescribed IRD interest rate.
If a person becomes a settlor it can lead to unintended tax consequence. The tax position of a trust is based on the tax residency of the settlor.