Trusts & Tax

How the trust’s income is taxed

The tax on a trust’s trustee income is calculated at a flat rate of 33 cents in the dollar for all three different types of trust. Beneficiaries who are New Zealand residents are liable for New Zealand income tax on all their income, from any source in the world. Beneficiary income they receive from any trust will be taxable in New Zealand, at their normal income tax rates.

Tax on trustee income

The trustee is liable for New Zealand income tax on income derived from New Zealand, irrespective of where the trustee resides. The trustee is also liable for New Zealand income tax on income derived from outside New Zealand where:

any settlor is resident in New Zealand at any time during the income year, or
any settlor of an inter vivo or a testamentary trust died while they were resident in New Zealand, and a trustee is resident in New Zealand at any time during the income year.

There are two situations in which a trustee is not liable for income tax on trustee income derived from outside New Zealand. These apply where the trustee is resident outside New Zealand at all times during the income year and either:

no settlement has been made on the trust since 17 December 1987, or
the only settlements made on the trust were by settlors who were not resident in New Zealand at the time of settlement and who have not been residents in New Zealand since 17 December 1987

Neither exception applies where an election to pay tax on trustee income has been made by the trustee. These exceptions do not affect the liability to income tax for any settlor of the trust, for example, where the settlor elects to pay tax on trustee income. The trustee income remains liable for income tax for the purpose of determining whether the trust is a complying trust.

Tax on beneficiary income

Beneficiaries who are New Zealand residents are liable for New Zealand income tax on all their income, from any source in the world. Beneficiary income they receive from any trust will be taxable in New Zealand, at their normal income tax rates.

Beneficiaries who are under the age of 16 may be subject to special rules. The trustee must pay tax on behalf of the beneficiary for income allocated to that beneficiary. The beneficiary can then claim a tax credit for the tax paid on their behalf. Beneficiaries are required to return all income received in their own Individual tax return (IR3).

However, the trustee and beneficiary can agree between themselves not to have tax deducted from trust income before the beneficiary receives it. This is called having the income “transferred direct”, and it may be useful in cases such as when the beneficiary has other tax losses to offset against the trust income in their tax return. If the income is transferred direct and the beneficiary does not pay any tax on it, the trustees can still be held liable for the unpaid tax.

There are also some other trust distributions beneficiaries must declare for income tax purposes.

Special rules for minor beneficiaries

The minor beneficiary rule applies to income derived from 1 April 2001 or the equivalent income year. Certain distributions of beneficiary income to children who are under 16 (minors) on the balance date of the trust must be taxed at a final tax rate of 33%. The rule does not apply to income derived in that income year if the minor turned 16 during that year. Minor beneficiary income is taxed as trustees’ income and is not the minor’s gross income.

For the purposes of entries in a beneficiary’s account with a trust, the tax on beneficiary income, although taxed as trustees’ income, is still treated as being paid on behalf of the beneficiary.

The minor beneficiary rule applies to beneficiary income derived by a minor from property settled on a trust by:

a relative or legal guardian of the minor, or
a person associated with a relative or legal guardian

The rule applies to all beneficiary income distributed to a minor from a trust unless all of the settlements on that trust were made:

by a settlor who received the property as agent for the beneficiary from someone other than a relative, guardian or their associate
by a settlor who has been ordered by a Court to pay damages or compensation to the minor
by a settlor against whom a protection order has been made under section 14 of the Domestic Violence Act 1995. This exception only applies if the minor is a protected person in relation to the protection order and the settlement on the trust is made before the protection order is made or during the time the protection order is in force, or
under the terms of a will, codicil, intestacy or any variations of these by a Court, if the minor or their brother or sister, or half-brother or half-sister, was alive within 12 months after the date of the Settlor’s death

When the rules don’t apply

If a trust includes some settlements that fit within one of these criteria, and some settlements that do not, special rules apply.

The rule does not apply if:

the minor is a non-resident
the minor receives a child disability allowance under the Social Security Act 1964
the beneficiary income is derived directly from a group investment fund, the Maori Trustee or a Maori authority, or
the beneficiary income derived is $1,000 or less in an income year

However, if the beneficiary’s income is over $1,000, all the beneficiary income is subject to the rule.

Other distributions to beneficiaries

As well as distributing beneficiary income, a trust can distribute money or assets to its beneficiaries in any of these ways:

by distributing trustee income accumulated in previous years
by distributing capital profits or gains made from disposing of some of its assets or property
by supplying trust property or services to the beneficiary for less than full value
by acquiring property or services from the beneficiary for more than full value
by making a distribution from the trust’s corpus – corpus is capital of the trust, equal to the market value of property settled on a trust at the date of settlement

A beneficiary who receives such a distribution may have to pay income tax on it, depending on the type of trust making the distribution. This is why the difference between complying trusts (formerly complying trusts), foreign trusts and non-complying (formerly non-complying trusts) is significant.

Distributions of accumulated trustee income and capital profits or gains that were derived by the trust in the 1988 or earlier income years are not treated as taxable distributions.

Trustees and taxation

Trustee income is all the income derived by a trustee other than the income that has been distributed to beneficiaries. The income distributed is beneficiary’s income. Complying trusts are taxed at 33%. Foreign sourced income derived by a trustee is liable to New Zealand tax.

Tax saving by using trusts

There can be considerable tax saving with a trust. If the trustee chooses to distribute some or all of the trust income to the beneficiaries this is taxed at the beneficiaries own tax rate. The main tax advantage of the trust is that it allows tax to be saved by splitting income off to individuals who pay lower rates of tax, than the original recipients.

In NZ, the proper and legal use of trust arrangements still remains one of the best avenues for minimising a taxpayer’s tax. In a discretionary trust the distribution of income is at the “discretion” of the trustee. This is a powerful tool for allocating income to obtain the maximum tax advantage. It is important to note that a “tax loss” cannot be distributed as in a partnership.

The trust’s income

The trust’s income is deemed to include certain settlements of property on a trust.

Property settled by a trustee of another trust to the extent that the property, if distributed to a beneficiary of that other trust at the date of settlement would constitute a taxable distribution or beneficiary income of the beneficiary of that other trust.
A settlement of property on a trust, which property would, but for the settlement, have constituted:
- gross income of the settlor, or
- a dividend for which the settlor would have been liable to deduct a dividend withholding payment if the settlor is a resident or if the settlor had been a resident in New Zealand and subject to income tax at that time.
A settlement of property on a trust for which the settlor claims a deduction from gross income for New Zealand tax purposes.

These settlements of property are excluded from the definition of corpus. The trust’s income is separated into two parts for tax purposes: beneficiary income and trustee income. The tax on these two parts is then calculated separately, to arrive at the total tax payable on the trust’s income.

Trust income from property

A trust will usually earn income from the money or property settled on the trust. In the trust rules the amount equal to the market value of the settled property is known as the “corpus”. The money or property (corpus) may be used as an investment to earn further revenue, or as capital to fund a trading operation. This revenue becomes the trust’s income as it is earned. The initial settlement on the trust is not income for tax purposes, but the settlor may have to pay gift duty on it, depending on the value of the settlement.

The following settlements of property on a trust are deemed to be trust income.

This means that these settlements of property are excluded from the definition of corpus:

Property settled by a trustee of another trust – so long as it would have counted as income if that trust had distributed the property to one of its beneficiaries instead.
A settlement of property on a trust, which, if not for the settlement, would have constituted:

- income of the settlor, or
- a dividend for which the settlor would have been liable to deduct an FDP (foreign dividend payment), formerly dividend withholding payment, if the settlor is currently resident or had been resident in New Zealand and subject to income tax at that time – see Note below.
A settlement of property on a trust for which the settlor claims a deduction from gross income for New Zealand tax purposes.

Dividing the trust income

Here’s how the income is divided:

Beneficiary income is all income derived by a trustee of the trust during any income year that either:
- vests absolutely in the beneficiary during that income year, or
- is paid or applied for the benefit of the beneficiary within six months after the end of that income year.
Trustee income is all income the trust earns in its income year that:
- does not vest absolutely in the beneficiary during that income year, or
- is not paid or applied for the benefit of the beneficiary within six months after the end of that income year.

As well as these 2 types of income, trusts can make other types of distributions, some of which will also be taxable. How the trust’s tax is calculated depends on the type of trust, and whether the settlor and/or trustees are New Zealand residents.

Beneficiaries and provisional tax

If a beneficiary’s residual income tax is $2,500 or more, the beneficiary will generally have to pay provisional tax for the following year. Residual income tax is the amount of tax due at the end of the year, after deducting all tax credits the beneficiary can claim, including tax paid by the trustee on the beneficiary’s behalf, but excluding provisional tax payments.

Non-resident beneficiaries

Beneficiaries who are not New Zealand residents for tax purposes only have to pay New Zealand income tax on trust income derived from New Zealand. Beneficiary income retains its nature in the beneficiary’s hands – for example, if the trust earned the income from dividends, the beneficiary should return it as dividends in their overseas tax return. The trust must deduct non-resident withholding tax from any interest, dividends or royalties before the non-resident beneficiary receives them, and this withholding tax is the final tax payable on the income.

The non-resident beneficiary should be able to claim a credit for this tax paid in their overseas tax return. Other income, such as income from a rental property, will be subject to New Zealand income tax at the normal rates. If a beneficiary is not a New Zealand resident, and they receive beneficiary income that did not come from New Zealand sources, the beneficiary will not have to pay New Zealand income tax on this income.

Beneficiaries temporarily ceasing to be resident

If a beneficiary ceases to be a New Zealand resident and then becomes a New Zealand resident again within five years, they must pay New Zealand income tax on any beneficiary income or taxable distributions received from a foreign or non-complying trust.

In this situation, any beneficiary income or taxable distributions the beneficiary received while they were a non-resident will be taxable as such in the year in which the beneficiary again becomes a New Zealand resident.

Information a settlor must give IRD

If a New Zealand resident settlor makes a settlement on a trust on or after 17 December 1987, and the trust did not have any New Zealand resident trustees at the time, the settlor must give us details of the settlement within three months of the date of settlement. The settlor must also give IRD the names and addresses of the trust’s trustees and beneficiaries.

For disclosure purposes, a settlement also includes one made as a nominee of another person, or of a nominal amount made at the request of another person. If all of a trust’s trustees cease to be New Zealand residents, the settlor must tell IRD within three months of the date on which the trust ceased to have a resident trustee.

FBT and ACC

If benefits are provided to a beneficiary who is not an employee of the trust or a person associated with an employee, FBT will not apply as the beneficiary is not receiving the benefit as an employee. No deduction is available to the trust for any expenses incurred in providing the benefit.
If your trust is an employer it must pay Accident Compensation Corporation (ACC) levies like any other employer. If the trust employs a beneficiary, the trust and the beneficiary-employee will pay ACC levies for liable earnings (e.g., salary and wages) paid to the beneficiary-employee.

Levies, as an employer include:

ACC workplace cover levies
Residual claims levy
Health and safety in employment levy.

Salary and wage earners have their earner’s levy included in the PAYE deduction.

What to show in your tax return

Add up the tax paid by the trustees and print the total in the appropriate Box. Print your share of the estate or complying trust income in the return.

If your estate or trust income includes:

Interest, withholding tax and gross interest show it
Dividends with imputation credits attached – show them also with dividend imputation credits, withholding payment credits and gross dividends.

Income from Foreign and Non-complying Trusts- If you are a beneficiary of a foreign or non-complying trust you must fill in a Schedule of beneficiary’s estate or trust income (IR 307) form.

The trust’s (taxee’s) tax return

The trustee must file an Income tax return: estate or trust (IR6) for the trust each year (this return is separate from the trustee’s own personal tax return).

In the IR6 return the trustee shows:

all income derived by the trust
the tax credits relating to that income
the allocation of income between beneficiary and trustee income, and
any taxable distributions made

The trustee then calculates the tax payable on the beneficiary income, trustee income and taxable distributions. An Estate or trust beneficiary details (IR6B) needs to be filled out for each beneficiary. This is then included in the IR6.

The beneficiaries can then claim a credit for tax paid on their beneficiary income and taxable distributions (and their share of tax credits) in their own personal income tax returns.

Note: A trust cannot choose to allocate credits to beneficiaries who may be better able to use them than other beneficiaries. The imputation credits and FDP (foreign dividend payment), formerly dividend withholding payment, credits attached to dividends distributed as beneficiary income must be allocated in proportion to the total distributions received from the trust.

The beneficiaries’ tax returns

If you receive beneficiary income from any type of trust, or a taxable distribution from a foreign trust, you must file a tax return for that year. Include this income in your tax return and pay tax on it at your normal rates. You can claim a credit for any tax the trust has deducted before they paid the income to you. However, if the tax was deducted overseas, the maximum credit a New Zealand beneficiary can claim is the amount of New Zealand income tax payable on their share of the overseas trust income.

If the trust’s balance date is not 31 March, you must include any income from the trust in your tax return for the year that corresponds with the trust’s accounting year. There is no need to make any separate calculations to allow for a difference in balance dates.

If you receive beneficiary income or taxable distributions from a foreign or non-complying trust (formerly non-complying trust), you should fill in the details of the trust income on a Schedule of beneficiary’s estate or trust income (IR307) form, and include this form with your tax return.

If the trust has a New Zealand tax agent, this agent will usually fill in an IR307 form for each beneficiary to include with their Individual tax return (IR3). These forms will show you how much income to declare, and the amount of any tax credits to claim.

Any taxable distributions a beneficiary receives from a non-complying trust are to be included separately in the beneficiary’s tax return. These distributions will be taxed separately at a flat rate of 45 cents in the dollar.

Types of NZ trusts for tax purposes

New Zealand has 3 types of trusts:

Complying trust – a standard New Zealand resident trust with New Zealand resident trustees and a New Zealand resident settlor.
Non-complying trust – a trust that was a foreign trust but the settlor has become a New Zealand tax resident.
Foreign trust – a trust where the settlor is a non-resident at the time a distribution is made. As a trust does not have a legal personality, there is no concept of residency for trusts. However, a trust is recognised as a New Zealand taxpayer and therefore New Zealand generally verifies the residency of the trustee.

Complying trusts

They are trusts that have been taxed in New Zealand on all their income since the date they started. They include trusts settled by New Zealand residents with New Zealand trustees, estates of people who were New Zealand residents when they died, and other trusts that have elected to become complying trusts. Include beneficiary income that is distributed to you by the trust.

Do not include other sorts of distributions, as they are exempt from tax.

Distributions of beneficiary income to which the minor beneficiary rule applies are taxed as trustee’s income. This means the trust is subject to tax on this income at 33 cents in the dollar, and it is included in the trustee’s tax calculation in the IR 6 return. These distributions should not be included in the minor’s individual tax return.

Foreign and Non-complying

All these other Trusts are either foreign or non-complying

Distributions from non-complying trusts

Copy the amount of taxable distributions from the non-complying trust and attach the IR 307 to the top of your return. IRD separate taxable distributions from non-complying trusts because the taxable distributions are taxed at a different rate. If you have this type of income, your tax calculation may not be correct. IRD will do this calculation for you and send you a notice of assessment.

Tax losses of trusts

In general if a trust’s expenses are greater than its income it will have a loss for tax purposes. This tax loss will be a loss of the trustee and cannot be passed to beneficiaries to offset against their income, except in limited circumstances. Losses can be passed to beneficiaries if they have a vested interest in the trust property from which the loss arises.

If a trustee suffers a tax loss in an income year, they can use it to reduce their taxable income in the next year.

How to claim tax losses

To claim the loss the next year the trustee will have to file an IR6 return. There are boxes in the IR6 form to disclose the loss and the amount claimed.

After a trust files an IR6 return reporting a loss we will send the trustees a letter which tells them the amount of the loss that can be brought forward. Generally this is the amount that should be entered in the IR6 return the next year. However, this amount may have to be adjusted if the trust has:

had an audit or made a voluntary disclosure which changed the amount of loss available; or
used part or all of its loss to pay tax debts or shortfall penalties

Losses can be carried forward by trusts from tax year to tax year until the loss is fully used or the trust is wound up.

Tax rates for trust

A trust is a type of legal entity that can own and hold title to property held for the benefit of one or more persons. It is a legal relationship, which is created when a person (known as a settlor) places assets in the control of another person (trustee) and these assets are intended to benefit other people (beneficiaries) or they are for a specified purpose.

Even though the assets, which are transferred to the trust through the trustees, become the property of the trustees, the fact is they only hold those assets on trust for the benefit of the beneficiaries. The trustees are the temporary owners of the property and they have to deal with it as set out in the trust.

In general:

The initial amount of money you put into a trust is not taxed, although you may need to pay gift duty
Any income the trust earns (e.g., through investment or business income) that it doesn’t distribute to its beneficiaries is taxed at a current 2016/2017 year flat rate of 33 cents in the dollar. The trustee is liable for paying this income tax regardless of where they live in the world.
Distributions to beneficiaries of the trust are taxed at the rate of tax applicable to each beneficiary as an individual.

The tax is payable by the trustees on trust on income not distributed to beneficiaries of the trust. In the case of trusts a flat rate currently of 33 cents in the dollar is payable under the name of the trustee for income that is retained by the trust. Income that is distributed to beneficiaries will be taxed at the beneficiaries’ individual tax rates.