Trusts and estates: How the trust's income is taxed
Special rules for beneficiaries who are children
The "minor beneficiary rule"
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%.
This 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.
Note: 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 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.
If a trust includes some settlements that fit within one of these criteria, and some settlements that do not, special rules apply. For more information see your tax agent, or call us on 0800 377 774.
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
- the minor turned 16 during that year, 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).
Date published: 18 Nov 2005
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