NZ Trust Tax Rate 39%: Planning Strategies for 2025-26
How the 39% trust tax rate affects NZ trusts in 2025-26, distribution strategies to consider, PIE fund alternatives, and compliance requirements under the Trusts Act 2019.
Published 22 March 2026 · Reviewed by NZ Tax Tools Editorial Desk
The 39% tax rate applied to trustee income was confirmed alongside the introduction of the 39% top personal income tax rate in April 2021. For trusts, this change was particularly significant: the historical incentive to retain income in a trust — because the company or trustee rate was lower than the top personal rate — was removed. Four years on, understanding how the trust tax rate operates in 2025-26, and what options remain for legitimate planning, is essential for any family or business that uses a trust structure.
The 39% Trust Tax Rate: Confirmed for 2025-26
| Tax applies to | Rate |
|---|---|
| Trustee income (retained in trust) | 39% |
| Beneficiary income (distributed to adult individuals) | Taxed at beneficiary’s personal rate |
| Beneficiary income (distributed to minor children) | Special rules apply (see below) |
| Company income held within a trust-owned company | 28% |
The flat 39% rate applies to all trustee income — income that is retained within the trust and not distributed to beneficiaries by the end of the income year. This rate matches the top personal rate, eliminating the old advantage of retaining income in the trust rather than distributing it to a high-earning settlor.
Why the 39% Rate Changed the Trust Equation
Before 2021, trusts paid income tax at a flat 33% on retained income. A settlor on the 33% top rate gained nothing from the trust (same rate), but a settlor now facing 39% had an incentive to distribute income to beneficiaries on lower rates — or to retain income in the trust at 33% rather than take it personally.
From April 2021, that 33% retained-income advantage disappeared. The trustee rate became 39%, matching the top personal rate and making retention more expensive, not less.
The only tax benefit of distribution now depends on the rates of the individual beneficiaries. If a trust has beneficiaries on 10.5% or 17.5% marginal rates (low-income adult family members), distributing to them can still be tax-efficient — but this must be genuine and commercially defensible, not merely a mechanism to shift taxable income.
Distribution Strategies: What Still Works in 2025-26
Distributing to Adult Beneficiaries on Lower Rates
Trustees retain the discretion to distribute income to any qualifying beneficiary. If a trust deed allows distributions to adult children, parents, or other family members with low income, those distributions are taxed at the recipient’s marginal rate.
Example:
- Trust earns $80,000 in rental and investment income
- Retained in trust: taxed at 39% → $31,200 tax
- Distributed equally to two adult children earning $20,000 each from other sources:
- Each receives $40,000 from trust
- Their total income: $60,000 each
- Tax on $40,000 additional income at 17.5%/30%: significantly less than 39%
The combined tax across both children would be lower than the $31,200 trustee tax — but the analysis depends on their actual income and rates.
Key requirement: Distributions must be genuinely paid to beneficiaries. A “notional” distribution where the money stays in the trust’s bank account while being recorded as owing to a beneficiary requires careful documentation. IRD has been scrutinising arrangements where distributions are recorded but never actually transferred.
Distributions to Minor Children: Anti-Avoidance Rules Apply
Distributions to minor beneficiaries (under 16) are taxed at the trustee rate (39%), not the child’s personal rate. This anti-avoidance rule prevents income splitting to minors who would otherwise pay little or no tax. The restriction applies to income, not capital distributions.
Spreading Income Across Multiple Beneficiaries
Where a trust has multiple adult beneficiaries — a common situation with family trusts — spreading distributions across several people on lower marginal rates can reduce the total family tax burden. This strategy is effective but must reflect the genuine intentions of the trust deed and the trustee’s exercise of discretion.
PIE Funds: A Tax-Efficient Alternative
Portfolio Investment Entity (PIE) funds offer a key advantage: investment returns are capped at a maximum Prescribed Investor Rate (PIR) of 28% — even if the investor’s personal rate is 33% or 39%.
For trusts and their beneficiaries, PIE investment can be materially more tax-efficient than holding the same investments directly:
| Scenario | Tax on $50,000 investment return |
|---|---|
| Retained in trust (direct investment) | $19,500 (39%) |
| Held in a PIE fund through the trust | $14,000 (28%) |
| Saving | $5,500 per year |
How Trusts Access PIE Rates
A trust can invest in a PIE fund. The trust itself nominates a PIR of 28% (as trustees are not individuals with income-based PIRs). Returns earned within the PIE are taxed at 28% and paid as tax within the fund — the trust receives the after-28%-tax return without further income tax liability.
This makes PIE funds particularly attractive for trusts holding investments that generate significant interest, dividends, or capital gains on foreign shares (subject to FIF rules).
Company Structures Within Trusts
Where a trust owns shares in a company, income earned within the company is taxed at the company rate of 28%, not 39%. Retained profits within the company are subject to the lower rate. This can defer taxation: income sits in the company at 28% and is only further taxed when dividends are paid to the trust (which then distributes them, or pays 39% trustee tax).
This is a legitimate but complex area. IRD scrutinises dividend policy within closely-held companies owned by trusts, and the retained earnings at company level may create tax debts if the company is ever liquidated or the shares sold.
Compliance Under the Trusts Act 2019
The Trusts Act 2019 came into force on 30 January 2021 and significantly increased the compliance requirements for all NZ trusts. For trustees in 2025-26:
Mandatory disclosures to beneficiaries
Trustees must now proactively disclose to beneficiaries:
- The fact that they are a beneficiary
- The name and contact details of the trustees
- The right to request further trust information
This is a significant change from previous practice. Many trustees of discretionary trusts historically kept beneficiaries unaware of the trust’s existence or their potential entitlements.
Records trustees must keep
Under the Act, trustees must maintain:
- A copy of the trust deed and any variations
- A list of assets and liabilities
- Records of trust property (financial statements)
- Records of trustee decisions, including documented reasoning for major decisions
- Copies of all documents relating to trust property transactions
Poor record-keeping is now not merely an administrative problem — it is potentially a breach of trustee duty.
Trustee duties
The Act codifies mandatory duties (which cannot be excluded by the trust deed) and default duties (which can be modified). Key mandatory duties include:
- Acting in accordance with the terms of the trust
- Acting honestly and in good faith
- Acting for the benefit of beneficiaries
- Not acting for the trustee’s own benefit (except as permitted)
Cost implications
The compliance burden under the Trusts Act 2019 has increased costs. Trusts now require more thorough annual accounts, more careful documentation of resolutions, and potentially more involvement of professional trustees or accountants. For smaller family trusts set up primarily for asset protection rather than income splitting, the ongoing cost of compliance can outweigh the benefits.
Many families have reviewed whether to continue operating trusts since 2021. Some have elected to wind up trusts where the administrative cost, combined with the loss of the tax-rate differential, no longer justifies continuation.
Should You Wind Up Your Trust?
Winding up a trust involves:
- Vesting assets in beneficiaries (potentially a disposal for tax purposes — check bright-line implications)
- Filing final tax returns
- Paying any outstanding tax
- Formal trustee resolutions and documentation
For trusts holding residential property, winding up and vesting the property in individuals can trigger bright-line rules if the property was acquired within the relevant bright-line period and the vesting is treated as a disposal. Legal and tax advice is essential before any wind-up.
Summary
For 2025-26, key trust tax points are:
- Trustee income tax rate: 39% — unchanged, matching the top personal rate
- Distributing to adult beneficiaries on lower rates remains a legitimate tax management strategy
- Minor beneficiaries (under 16) receive no benefit — distributions are taxed at 39%
- PIE funds offer a 28% cap on investment returns — a significant advantage for trusts with investment income
- Company structures within trusts pay 28% — but add complexity and IRD scrutiny
- The Trusts Act 2019 significantly increased disclosure and record-keeping obligations, adding compliance costs
- Review whether your trust structure still makes financial sense given the current rate environment and compliance burden
If you operate a discretionary family trust, a conversation with your accountant and solicitor before 31 March 2026 is worthwhile — both to review distributions for the current year and to consider the trust’s long-term structure.