39% Trust Tax Rate
On 18 May 2023, the government introduced the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. The Bill includes draft legislation that will see the trust tax rate increase from 33% to 39% from 1 April 2024, thereby aligning it with the top personal marginal tax rate.
Between 2000 and 2010, the top personal marginal tax rate was also set at 39%. Throughout that period, the trust tax rate remained at 33%. The government has cited the recent re-introduction of the 39% top personal tax rate as the reason for the increase in the trust tax rate. 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.”
Much like when the top personal marginal tax rate increased to 39%, taxpayers will no doubt consider ways to minimise their exposure to the 39% rate. However, unlike the top personal rate, the 39% trust rate will apply from the first dollar a trust derives. This means the scope of the change is likely to be broader without active planning. We are likely to see a significant increase in beneficiary distributions. It is common for trusts to distribute income to their beneficiaries to utilise their lower marginal tax rates. However, because the 39% personal tax rate doesn’t apply until $180,000, trusts could commence making large distributions to beneficiaries. When we consider that trusts often distribute to children, we could see many young adults receive distributions of up to $180,000. This will have flow on effects to student loan and provisional tax obligations.
Between now and the new rate coming into effect, there is still the outcome of the general election to be decided. This is likely to mean most people will wait until the outcome is known. However, if the new trust rate does come into effect, large dividends are likely to be declared to extract retained earnings from companies owned by trusts, at a rate of 33%, sheltering them from having to pay the 39% rate on these earnings in the future. A similar trend was seen prior to when the 39% personal marginal rate came into effect.
Some taxpayers will question whether this change disqualifies trusts as a viable structuring option. However, the reality is that the asset protection and succession planning advantages still exist, irrespective of the tax treatment.