The way Trusts are taxed in New Zealand can be confusing for people. We’ll try to simplify it here, but on the proviso that if you have questions regarding your own situation, it is essential to obtain specific advice.
The reason it can be confusing is that it depends on what type of trust you have, and also what sort of distribution you intend to make.
Trust income tax
Lets start by saying that if a normal NZ trust (a “complying trust”) earns income it will be taxed at 33% unless that income is distributed to a beneficiary of the Trust. If it is, the income will be taxed at the beneficiary’s income tax rate (unless the beneficiary is a minor). All straightforward so far.
If the trustees wish to distribute Trust income to beneficiaries they must generally do so by the end of the tax year after the income was received by the Trust. If income is not distributed it will be added to the capital of the Trust.
What about distributions of capital?
Where it gets confusing is that a Trust doesn’t have to distribute income to be able to provide for the beneficiaries. The Trustees can distribute capital, from trustee income accumulated in previous years, or they can distribute capital gains made from selling Trust property. They can also provide Trust property to a beneficiary for less than market value.
In most situations, these ways of providing for beneficiaries are not taxable (unlike the distribution of income, as stated earlier). That will be the case for a normal Trust settled by a New Zealand resident (known as a complying trust).
Different tax rules apply for foreign or non-complying trusts.
NZ Foreign trust
A Foreign Trust is a trust with which does not have a New Zealand resident settlor, but has a New Zealand resident trustee. It may have income sourced in New Zealand, and may have New Zealand resident beneficiaries.
Currently a distribution by a Foreign Trust to a New Zealand resident beneficiary, including a capital distribution or the supply of property or services at under value, will be taxable at the beneficiary’s tax rate.
However a non-New Zealand resident beneficiary receiving a taxable distribution from a Foreign Trust will only be liable for income tax on income sourced in New Zealand.
Non-complying trust
A Non-Complying Trust is any Trust that is neither a Complying Trust or a Foreign Trust at the time it makes a distribution. Basically, any income or capital distribution made will be taxed at 45%.
So its quite important, for example, if a New Zealander has formed a Trust then gone overseas to live (at which point their previously complying trust becomes a non-complying trust), that when they return to New Zealand they elect to make their trust complying again.
Other types of tax
As a separate legal entity, a Trust will also need to consider other types of tax in the same way as you or I would.
So if, for example, the Trust is conducting a business it will generally need to be GST-registered; and if it is hiring staff it will need to pay PAYE.
Trust buying property
If a Trust is buying property, the trustees will need to be aware of their obligations under the “Bright Line” test whereby the gain on any sale of property (other than the “main home”) within five years of acquisition will be subject to income tax.
Tax losses
The Trustees will also need to understand how tax losses work.
Essentially, if a Trust owns property or a business where the expenses and taxable deductions (such as depreciation and interest) exceed the income, the Trust will have no tax to pay because it has made a tax loss. This tax loss can be offset against any future tax liability in future years.
Trustees are personally liable for any unpaid taxes owed by a Trust. So financial statements and tax returns should be completed annually.
What if you are an “Independent Trustee”?
Some housekeeping matters for independent trustees in particular.
It is essential for Trustees to understand the Trust Deed and the Trust’s business, and have a separate bank account for it (into which all trust income should be paid (and out of which all trust expenses should be paid).
Trustees should also meet once a year (more often if the Trust is actively engaged in a business), and all trust decisions should be recorded by Resolution.
Feel free to discuss with us by contacting or phone 03-4500000.