PIE time: how trusts can side-step a 40% higher tax bill as new high rates kick in

Article written by InvestNow – 29th February 2024

A shockwave is due to roll over New Zealand trusts in just a few weeks, adding on average more than $22,000 to the annual tax bill of the estimated 44,250 trusts caught in its wake – unless they take action now.

Due to come into force on April 1, the well-signalled jump in the trustee tax rate from 33% to 39% will largely impact the top quarter of NZ trusts with assessed income that pay almost all of the tax levied on the sector.

Meanwhile, the top 5% of trusts, roughly 9,000, account for close to 80% of the trustee income tax impost across the industry.

The former Labour government-initiated move brings the trustee tax rate in line with the top marginal rate but – unlike the stepped thresholds for individuals – applies across all income.

And following an earlier Labour-led change that made beneficiary distributions less attractive for many trusts, the scale of top-end taxable ‘trustee income’ soared from $11.4 billion in 2020 to $17.1 billion in the 2021 financial year, according to Inland Revenue (IR).

The statistics imply the 9,000 highest earning trusts generated an astonishing $13.4 billion of trustee income between them in 2021 – or almost $1.5 million each on average: for the top 25% highest earning trusts the average trustee income computes to around $388,000.

Based on the IR data, the hike would see those income-producing trusts pay an average extra $22,000 in trustee tax in the next financial year, a figure which rises to $88,000 for the top 5% of income-producing trusts.

An investment action plan

Despite the shocking headline numbers, trusts can easily limit the damage by shifting investment assets, where possible, into portfolio investment entity (PIE) funds.

PIEs feature a top tax rate of 28%, which, crucially, is a final tax for all investors. Even at the current 33% tax rate, PIE managed funds are compelling investment vehicles for trusts but at 39% the decision should be a no-brainer.

Assuming trusts can switch all their income-producing assets into like-for-like PIE managed funds, our analysis suggests the 44,250 trusts due to bear the brunt of the increase would pay an average $41,000 or so less in the coming tax year than if left facing the 39% rate.

Under the same assumptions, for the top 5% highest earning trusts shifting to PIEs would lower their next annual tax bill by about $162,000 on average compared to sucking-up the full new higher rate.

Of course, not all assets have a PIE equivalent – especially, illiquid ones like private businesses or property – but trustees need to work with their professional advisers such as lawyers, financial planners and accountants to identify the best tax-effective solutions for their investment assets.

When it comes to trustee income, PIE managed funds can offer considerable tax savings compared to directly held cash, shares, bonds, term deposits etc while maintaining the overall trust investment exposure.

By our calculations, in real terms trusts that don’t adjust their asset structures could pay up to 40% more in tax in the 2024/25 financial year versus those that move to PIE managed funds.

Change now via InvestNow

InvestNow is uniquely placed to facilitate more tax-efficient investment portfolios for trusts in the looming 39% rate world.

Established in 2017, the platform now administers over $1.5 billion for a variety of investors including a substantial number of trusts.

We have set up specific trust onboarding and governance protocols allowing trustees to effectively manage their investments in a compliant manner and with sophisticated reporting tools.

Our investment menu of some 150 plus PIE managed funds from 30 different investment managers covering local and global fixed income, equities and cash.

Click here for information on how InvestNow services trust clients and check out our wide range of PIE managed funds offered by dozens of reputable, licensed investment managers.

Or call us today on 0800 499 466 to find out more about using PIE managed funds to ensure trustee income is only taxed at a maximum rate of 28%, and how your trust could side-step a 40% higher tax bill!

The information and  opinions in this publication are based on sources that InvestNow believes are reliable and accurate. InvestNow makes no representations or warranties of any kind as to the accuracy or completeness of the information contained in this publication and disclaim liability for any loss, damage, cost or expense that may arise from any reliance on the information or any opinions, conclusions or recommendations contained in it, whether that loss or damage is caused by any fault or negligence on the part of InvestNow, or otherwise, except for any statutory liability which cannot be excluded. All opinions reflect InvestNow’s judgment on the date of this publication and are subject to change without notice. This disclaimer extends to any entity that may distribute this publication. The information in this publication is not intended to be financial advice for the purposes of the Financial Markets Conduct Act 2013, as amended by the Financial Services Legislation Amendment Act 2019. In particular, in preparing this document, InvestNow did not take into account the investment objectives, financial situation and particular needs of any particular person. Professional investment advice from an appropriately qualified adviser should be taken before making any investment.