Trustee Tax
Trustee income — income a trust earns and retains rather than distributes to beneficiaries — is taxed at a flat 39% rate under the Income Tax Act 2007 s HC 22. This rate was raised from 33% to 39% by Budget 2023, effective for the 2024-25 income year onwards, to match the top personal marginal rate and remove the incentive to shelter income in a trust.
A de minimis carve-out (s HC 40) softens this for small trusts: if a trust's net trustee income for the year is $10,000 or less, the WHOLE amount is taxed at 33% instead of 39% — it's a cliff, not a marginal band, so a single dollar over $10,000 pushes the entire amount to 39%.
Trustees can reduce the overall tax bill by distributing income to beneficiaries instead of retaining it — beneficiary income is taxed at the beneficiary's own marginal rate (10.5%–39%), which is often lower than the flat trustee rate, especially for beneficiaries with modest other income. This trade-off between retaining income (flat 39%/33%) and distributing it (beneficiary's marginal rate) is the core decision trustees face each year.
How it works
Trustees report trustee income on the trust's own IR6 return each year, separately from any beneficiary income that has been allocated and taxed in beneficiaries' hands. The 39% rate (or 33% under the de minimis) applies only to income the trust genuinely retains — income validly distributed and taxed as beneficiary income is taxed at that beneficiary's own rate instead, so the classification decision has to be made and documented before the return is filed.
The $10,000 de minimis is a cliff test applied to the trust's net trustee income for the whole year, not a tax-free bracket — a trust with $9,999 of net trustee income pays 33% on all of it, while a trust with $10,001 pays 39% on all of it, a $661 swing from a single extra dollar of retained income. This makes year-end planning around exactly which distributions to finalise before balance date genuinely consequential for small trusts sitting near the threshold.
For larger trusts well above the de minimis, the core annual decision is how much to retain versus distribute: retaining locks in the flat 39% rate regardless of the trustees' or beneficiaries' personal circumstances, while distributing to a beneficiary on a lower marginal rate (as low as 10.5%) can meaningfully reduce the trust's overall tax cost — provided the distribution is genuine and properly documented, since sham or backdated distributions attract IRD scrutiny.
Example: the de minimis cliff in action
A family trust earns $10,000 of net trustee income for the year and distributes nothing. Because $10,000 sits at the de minimis limit, the whole amount is taxed at 33%, giving $3,300 of trustee tax.
If the trust had instead earned $10,001 of net trustee income, the entire amount — not just the extra dollar — would be taxed at 39%, giving $3,900.39 of trustee tax. The single extra dollar of income costs the trust an additional $600.39 in tax, illustrating why the threshold is a cliff rather than a marginal band.
Frequently asked questions
Can a trust avoid the 39% rate entirely by distributing everything to beneficiaries?
Yes — income that is validly allocated and taxed as beneficiary income is taxed at the beneficiary's own marginal rate rather than the flat trustee rate, so a trust that distributes all its income each year never pays trustee tax.
What's the practical difference between trustee income and beneficiary income?
Trustee income is retained by the trust and taxed at the flat 39%/33% trustee rate on the trust's own return, while beneficiary income is validly allocated to a named beneficiary and taxed at that person's individual marginal rate instead.
Does the $10,000 de minimis threshold apply per trust or across all trusts a person controls?
It applies per trust, based on that trust's own net trustee income for the year — someone who is a trustee of several small trusts can potentially have each one separately qualify for the 33% de minimis rate.
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