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Trustee tax rate increase highlights continuing tax avoidance uncertainty

Home Insights Trustee tax rate increase highlights continuing tax avoidance uncertainty

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Contributed by: Greg Neill

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Published on: February 28, 2024


The New Zealand income tax rate applicable to trustee income is expected to increase from 33% to 39% with effect from 1 April this year. This will align the trustee tax rate with the highest tax rate for individuals.

Earlier this month, Inland Revenue issued high-level guidance for taxpayers and advisers regarding transactions entered into in contemplation of that rate change and potential areas of tax avoidance concern1. The issuance of timely guidance by Inland Revenue which highlights areas of concern is helpful for taxpayers and has been widely commended.

The guidance, however, highlights the prevailing uncertainty with respect to tax avoidance law in New Zealand both for private client and commercial matters. While the guidance is useful, the permitted scope for taxpayers to freely make transactional and structural changes directly and solely having regard to tax matters remains unclear. In particular, the circumstances in which the deliberate pursuit of a lower tax rate on income is permissible.

Inland Revenue guidance - qualified by "artificial and contrived features"

The Inland Revenue guidance addresses the following situations that have been put to it regarding tax avoidance matters and the pending trustee tax rate increase:

  • A company is owned by a trust and changes its dividend paying policy.

  • A trustee distributes income to a beneficiary so it is taxed to the beneficiary at a lower rate rather than at the trustee tax rate.

  • A trustee adopts a company structure and transfers its income-earning assets to the company.

  • A trustee chooses to wind up the trust.

  • A trustee chooses to invest in a portfolio investment entity (or "PIE").

In summary, the guidance notes that none of the above scenarios should, on the face of it, give rise to tax avoidance concerns. That conclusion is perhaps not surprising given the innocuous nature of the scenarios.

It is important to note, however, the subtle caveat for "artificial and contrived features" provided for in the guidance. The Inland Revenue comments regarding each of the five scenarios listed above are, in each of the five cases, separately qualified by there being an absence of artificial or contrived features.

While that principle is not controversial in a tax avoidance context, it remains unclear when a transactional choice made purely for tax reasons is acceptable and when that choice runs the risk of being characterised as "artificial or contrived".

Where exactly is the line?

In tax avoidance matters, the key guiding principle is whether a course of action makes use of a legislative provision in a manner that is consistent with Parliament's purpose.

The identification of "Parliamentary contemplation", however, is often not an easy exercise. In particular, many taxpayers continue to struggle with the concept of deliberately pursuing a course of action for the resulting tax consequences and the concern that such a course is "artificial or contrived".

Inland Revenue's revised Interpretation Statement on the general anti-avoidance provision explains that the use of legislated options or actions existing only for tax is not artificiality or contrivance if no additional features exist2:

"Artificiality or contrivance in this context are not being used to describe uses of specific provisions that involve nothing more than explicitly legislated options or actions that have a purpose or effect only for tax and have no existence outside the Act in the real world of commercial or private dealings...

… the use of such options and actions will not, in and of themselves, be artificial or contrived. Without additional features, arrangements involving such options or actions will not be tax avoidance arrangements because their use of these options has been contemplated by Parliament."

In the case of the deliberate pursuit of a tax result, the exercise then is identifying the line between arrangements that have "artificial or contrived features" and those that have been contemplated by Parliament.

The difficulty inherent in this distinction is illustrated by the preceding comment regarding the nature of "contrivance"3:

"A contrivance is a course of action that is devised, created or planned to attain a specific end (in this context, a tax advantage). The specific end:

  • does not arise naturally, spontaneously or in an unplanned way; and
  • is not an incident of some other end or aim."

Making deliberate changes to mitigate increased trustee tax rate

In the context of the trustee tax rate change it seems clear that, at one end of the spectrum, simple choices such as holding assets in a company rather than a trust, or investing trust funds in a PIE rather than directly, are acceptable structural choices. That would also extend to a general group investment fund choosing to elect into the PIE rules to enable its investors to benefit from the lower tax rates.

Other scenarios, however, are less clear. For example, seeking to have trust income taxed at the corporate tax rate by the addition of a new corporate beneficiary to a trust or the interposition of a company in between a trust and a private equity investment (excluding "dividend stripping" arrangements potentially involving debt). The latter scenario may facilitate the "parking" of dividends and imputation credits in the holding company rather than being taxed to a trustee at 39%.

In principle, both these scenarios should give rise only to a timing advantage as the company shareholders should eventually be taxed on income distributed by the company at their marginal rates. The issue however is that, although these alternatives are freely available under the legislation, it is not clear whether they are "artificial and contrived" as alluded to by the Inland Revenue guidance or merely permitted structural choices contemplated by Parliament.

Where to from here?

At the recent 2024 International Fiscal Association conference, the Minister of Revenue highlighted the need for certainty in the tax system.

General anti-avoidance considerations have a large part to play in achieving that certainty. The fact that, for example, taxpayers are not entirely sure whether it is permissible to merely transfer income-earning assets from a trust to a company is far from ideal in a commercial landscape where certainty is the goal.

As noted above, while the recent Inland Revenue guidance is useful and welcomed by taxpayers, the tax avoidance landscape remains precarious with respect to transactional and structural matters. For the foreseeable future, specialist advice and Inland Revenue binding rulings appear the best avenues for addressing risks in this area.


  1.  GA 24/01 Proposed increase in the trustee tax rate to 39% (2 February 2024)..

  2.  IS 23/01 Tax avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007 (3 February 2023); paragraphs 7.23 and 7.25.

  3. Ibid; paragraph 7.22.

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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