The Finance and Expenditure Select Committee finally reported back on the Taxation (Annual Rates for 2023-24. Multinational Tax, and Remedial Matters) Bill ahead of its final reading in Parliament later this month. This Bill includes some important changes for large multi-nationals, but the main talking point in this Bill for many is the introduction of a 39% tax rate for Trusts as announced by the previous Government.
39% tax rate for Trusts
It is not a surprise that the new National-led Government decided to proceed with the introduction of the 39% tax rate. It is, however, very disappointing that while the Select Committee acknowledges that this change will cause over taxation and additional compliance costs, the only significant change made is an exemption from the 39% tax rate for trusts with net trustee income of $10,000 or less.
The Select Committee explains the rationale for a low exemption threshold as follows:
“A $10,000 threshold (rather than a higher one) would also mitigate the incentive to create multiple trusts to take advantage of the lower tax rate. The maximum benefit would be $600. (A trust with $10,000 in income would pay $3,300 in tax. A trust with $10,001 in income would pay $3,900 in tax.)
We note that ongoing compliance costs for a trust can range from $750 to $1,000, negating the $600 maximum benefit. Given this low incentive to settle multiple trusts, we do not think there need to be additional rules or anti-avoidance provisions.
A threshold higher than $10,000 would increase the maximum possible benefit of settling multiple trusts, incentivising this behaviour and increasing the need for a complicated anti-avoidance provision.”
It is true that a threshold for low-income trusts creates an incentive for settling multiple trusts, but the $10,000 threshold is far too low to balance that risk against the over-taxation risks. Furthermore, New Zealand tax avoidance law has evolved in such a way that the Inland Revenue would have no issue using its existing tools to combat cynical behaviour of settling multiple new trusts to circumvent any income threshold. Therefore, there would be no need for a “complicated anti-avoidance provision” as suggested as the existing general anti-avoidance provision and penalties for avoidance scheme promoters would be more than adequate to combat attempts to circumvent the tax rate change.
Ultimately, this $10,000 de minimis is no more than what might have been expected from the Select Committee under a Labour Government.
Detail of further changes yet to be publicly released
Further tax changes will be introduced to the Bill by way of an Amendment Paper (formerly known as a Supplementary Order Paper) before the Bill passes at the end of the month. The draft Amendment Paper has not been released publicly yet. However, we know that the Amendment Paper will, amongst other things, include the rollback of bright line to two years and the reintroduction of interest deductibility for residential rental properties.