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A GUIDE FOR NEW ZEALAND FARMERS BY

INTRODUCTION

With the recent changes in tax rates, New Zealand farmers face fresh challenges and opportunities. One significant change is the increase in the top individual tax rate to 39% for incomes over $180,000 and the change in the trust tax rate to 39%. This has raised questions about the viability of using trusts as a tax-efficient structure.  

Here, we’ll explore whether trusts still serve a beneficial purpose under this new tax landscape and offer practical insights tailored for dairy farmers and others in the agricultural sector. 

What is a Trust? 

A trust is a legal arrangement in which one party (the trustee) holds assets for the benefit of another (the beneficiary). In farming, trusts are often used to manage and protect assets, plan for succession, and manage tax liabilities. 

BENEFITS OF USING TRUSTS IN FARMING

Before we get into the impact of the new tax rate, let’s revisit why many farmers have historically used trusts: 

1. Asset Protection 

A trust is a separate legal entity and, as such, can act as a shield against potential risks that can affect your farming assets. They can effectively protect your land, livestock, and equipment from claims due to business failures, lawsuits, or divorce settlements. By placing your assets in a trust, they are held outside your personal name, mitigating exposure to creditors and other liabilities. 

2. Succession Planning 

Trusts can simplify the complex process of transferring farm ownership to the next generation. Clearly outlining how assets should be managed and distributed ensures a transition that aligns with your family’s wishes. This structured approach could also help avoid family disputes, creating clarity around ownership, responsibilities, and expectations. 

3. Income Splitting 

Trusts can facilitate income distribution among family members, potentially lowering overall tax liabilities. Depending on how income is allocated, trustees can use lower marginal tax rates for beneficiaries, effectively reducing the total tax cost, which, over time, could be a significant tax benefit. 

4. A Tailored Approach 

Trusts can be tailored to fit individual needs, accommodating specific circumstances or wishes. Whether you have unique asset types or particular objectives for your farm, trusts can be drafted with versatile terms to suit. This flexibility enables you to adapt to changing family situations or market conditions while maintaining a structure that supports your goals. 

THE IMPACT OF THE 39% TAX RATE

The increase in the top personal and trustee income tax rate to 39% has led to some reconsidering the benefits of placing income-generating assets in trusts. Here’s how this change might affect your decision: 

Higher Tax on Retained Income 

Previously, income retained in a trust was taxed at a flat rate of 33%; now, it will be taxed at 39%. We need to pay greater attention to how the trust funds are distributed to ensure we are using lower marginal tax rates where appropriate. 

Potential for Increased Administrative Costs 

Managing a trust effectively to optimize tax outcomes can become more complex, potentially increasing administrative and professional advisory costs.  

Reconsidering Income Splitting 

While trusts still offer the advantage of income splitting, the benefits may diminish if beneficiaries are in higher tax brackets. Evaluating the net tax impact of distributions versus retaining income within the trust is crucial. 

ALTERNATIVES TO TRUST STRUCTURES

Partnerships 

A business partnership can be an attractive alternative, particularly if the trust’s primary goal is income splitting. Partnerships allow income to be distributed according to each partner’s share, potentially lowering the overall tax liability if partners are in lower tax brackets. However, partnerships come with challenges like shared liability and potential conflicts between partners. 

Companies 

Forming a company might be another viable option. Companies are taxed at a flat rate of 28%, which could be more advantageous than the 39% personal tax rate. This structure provides limited liability protection. However, once profits are distributed to shareholders, they are subject to personal tax rates, so careful planning is required. 

MAKING THE RIGHT CHOICE

Review Your Numbers 

Your first step should be to review your numbers and compare the tax implications of using a trust, partnership, or company. This will help you understand which structure offers the most benefits under the new tax regime. 

Consult with Accountants 

Given the complexity of tax laws and their significant impact on your farm’s profitability, consulting with financial advisors who specialise in agricultural enterprises is crucial. They can provide tailored advice based on your unique situation. 

Revisit Your Succession Plan 

If succession planning is key to your trust, reevaluate how the new tax rates affect your long-term goals. Sometimes, the benefits of a trust for succession planning may outweigh the immediate tax implications. 

CONCLUSION

While the increase in the tax rates to 39% has certainly made the tax landscape more complicated, trusts still offer significant benefits for asset protection, succession planning, and income splitting. However, it’s essential to re-evaluate your current structures and consider all your options. 

At CMK Accountants, we specialize in helping farmers like you confidently navigate these changes. Our team is dedicated to providing personalised, expert advice to ensure your financial strategies align with your long-term goals. 

If you think it is time to review your current structure, please do not hesitate to email us at cmk@cmk.co.nz. Together, we can create a plan that maximizes your hard-earned assets, ensuring they work for you now and in the future. 

JOIN JOHN DAZLEY AND SALLY COOMBE FROM CMK CHARTERED ACCOUNTANTS ON WEDNESDAY 25 SEPTEMBER AT 12:30PM FOR A LIVE WEBINAR, AS THEY BREAK DOWN TRUST TAXATION CONCEPTS, MAKING THEM EASY TO UNDERSTAND AND APPLY TO YOUR UNIQUE SITUATION.