Make sure you're using the right RWT rate - trusts

Interest income

If you receive interest RWT will usually be deducted from this income by the payer and sent to us.

It is important that you choose the RWT rate appropriate for your circumstances. This ensures that the correct amount of tax is deducted from it. If you choose a rate that is too low, you will have a tax bill to pay at the end of the income year.

You also need to make sure your interest payer has your IRD number.

Where it is identified that you are using a rate that is not consistent with your marginal tax rate we can advise your interest payer to change your rate. You will receive a letter advising you of the change. If you think you should be using a different rate, please go to your interest payer's website for information about changing it, or contact the interest payer directly.

RWT rates for 1 April 2010 - 31 March 2011

Trustees may choose any of the following rates except trustees of testamentary trusts who may choose the lowest rate 10.5% (reduced from 12.5% on 1 October 2010).

During the 2011 tax year the RWT rates were changed and your interest payer will have moved your RWT rate as follows:

If you have ....	then your RWT rate 1 April 2010 to 30 September 2010 is ...	and your RWT rate 1 October 2010 to 31 March 2011 is...
given your interest payer your IRD number (testamentary trust only)	12.5%	10.5%.
given your interest payer your IRD number	21%	17.5%.
given your interest payer your IRD number and elected this rate	33%	30%
given your interest payer your IRD number but not elected a rate where a new account was opened after 31 March 2010	38%	33%
given your interest payer your IRD number and elected this rate	38%	33%
not given your interest payer your IRD number	38%	33%

Budget 2010 change for trustees

Budget 2010 aligned RWT rates with the 1 October 2010 income tax rate changes. The RWT rate change does not only change the rates for individual it also changes the rates for trustees.

However, the income tax rate for trustees of many trusts, such as family trusts, is not changing. Under the new legislation this means that all interest payers, such as banks, were required to change all trusts RWT rates. In particular those on 33% RWT rate moved to the 30% rate on 1 October 2010.

Impact of changes on your trust

If your trust allocates income as beneficiary income to utilise the beneficiaries' marginal tax rate then the change may not impact you and the decrease in the RWT rates should continue to reflect the beneficiaries' marginal tax rate.

For the 2012 income year the RWT and personal income tax rates will align. There will be a reduced RWT credit if the interest is paid in the period 1 October 2010 to 31 March 2011.

Various tax rates that apply if the trust's interest income is treated as beneficiary income

Income range	RWT rate 1 April to 30 September 2010	RWT rate 1 October to 31 March 2010	Personal income tax rate for 2011 income year
$0 to $14,000	12.50%	10.50%	11.50%
$14,001 to $48,000	21%	17.50%	19.25%
$48,001 to $70,000	33%	30%	31.50%
$70,001 and up	38%	33%	35.50%

If your trust treats income as trustee income and your trust's RWT rate was 33% prior to 1 October 2010, then it will have been moved to 30% on 1 October 2010.This will mean you will likely pay insufficient tax on this income which may impact your end of year tax calculation.

If the trust's interest is all paid in the period 1 April 2010 to 30 September 2010 then there will be no impact.

If the interest is paid evenly at regular times throughout the year then the payments made in the period 1 October 2010 would be taxed at the new rates which results in a reduced RWT credit. The reduced tax credit will result in an income tax liability of this amount that you will need to pay or it will reduce an expected tax refund.

If the interest is all paid in the period 1 October 2010 to 31 March 2011 the new rate will apply which also results in a reduced RWT credit. If the income is allocated as beneficiary income the RWT rates may align with the beneficiary's income tax rate.

However if the trust's income is allocated as trustee income then there is likely to be a tax shortfall as shown in the following examples.

 

Where the tax or provisional tax is not paid by the due date use of money interest may be applied.

What you need to do

The types of issues you need to consider include:

• Check if the trusts new RWT rate is right for your circumstances. You may consider changing back or using another RWT rate. You will need to contact your interest payer to change your rate.
• Consider if there is any impact on allocations to beneficiaries.
• Plan for any increased residual income tax or provisional tax liability.
• If a payment of interest has already been made since 1 October 2010 with the new RWT deducted you will also need to consider the impact and plan accordingly.

If you are unsure about what to do you seek advice from a tax advisor.

 

Date published: 06 Oct 2010

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