Children caught in trust revamp

Cullen's move has tax advisers crying foul, reports GEOFF SENESCALL.

A tax crackdown on family trusts is expected to see up to $15 million a year taken away from children under the age of 18.

In a move that has prompted an outcry from tax advisers, Revenue Minister Michael Cullen has indicated that from next April the tax rate of distributions made to "minors" will be raised from 19.5 to 33 per cent.

Dr Cullen said the rationale was to "prevent channelling of income through trusts to minors as a means of reducing tax payable by individuals."

John Shewan, a tax partner for PricewaterhouseCoopers, said the move was effectively an increase in tax - something the Government had said it would not do.

"They will say the rate of tax on trusts has not changed, but this move in practical terms does increase by 69 per cent the rate of tax payable by minor beneficiaries."

Mr Shewan said he understood the Government's concern about income splitting. But laws were in place to prevent the misuse of trust funds.

"Once again the Government is cracking the nut with a sledgehammer as a result of a perceived inability to police the existing rules.

"Given that most farms are owned by trusts and a huge number of small businesses are owned by trusts, this is not the kind of thing that could be described as a business-friendly measure."

There are nearly 100,000 discretionary trusts in New Zealand, most of which are family trusts.

Thomas Pippos, of Deloitte Touche Tohmatsu, said the Government was being unnecessarily harsh.

"No one ever pays $38,000 to their kids out of distributions from the trust, not unless they are quite wealthy individuals. More often than not the distributions will be to fund school fees and that sort of stuff."

Mr Pippos said the move would also affect vulnerable people such as orphans and the handicapped, although the Government indicated it would consider exemptions.

This was not the end of family trusts, he said, as income splitting could still happen. Spouses with no income could still use the lower rate.

"It still enables you to shelter your investment income at 33 per cent rather than 39 per cent [the top marginal rate for those earning more than $60,000 a year]."

Under existing rules, the first $38,000 of income is taxed at 19.5 per cent.

David Carrigan, an adviser to Dr Cullen, said: "The rationale is that all we have at the moment is the anti-avoidance rule for inappropriate income splitting.

"And with the top [tax] rate going up to 39 per cent, the incentive to use that sort of thing is now a lot greater."

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