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Trusts and estates: 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.
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 vivos (trust created by the settlor during their lifetime) or a testamentary (trust created by a person under their will) trust died while they were resident in New Zealand, and a trustee is resident in New Zealand at any time during the income year.
Exceptions to the general rule
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 (formerly qualifying trust).
If a trust was settled before 17 December 1987, and no settlement has been made on the trust since that date, the settlor is not liable for tax on trustee income unless they elect to pay tax on it.
If a settlement has been made on a trust since 17 December 1987, any settlor who is a resident in New Zealand at any time during the income year is liable for income tax on trustee income as agent of the trustee, subject to certain exceptions. If there is more than one New Zealand resident settlor, these settlors are jointly and severally liable for the tax on trustee income. This means that any or all of the New Zealand resident settlors are liable for this tax.
The New Zealand resident settlor will not be liable for the income tax on trustee income if any of these conditions are met:
- A trustee is resident in New Zealand at all times during the income year.
- The settlor (being a natural person, that is, not a company) was not a New Zealand resident at the time they made any settlement on the trust, unless the settlor elects to pay tax on trustee income.
- The settlor can show to Inland Revenue's satisfaction that their share of the trust's tax liability is excessive, taking into account the settlements on the trust made by all settlors.
- The trustee income is derived by the application of the accruals rules of the Income Tax Act to any amounts remitted by the settlor under any financial arrangement.
If a trust's residual income tax at the end of an income year is $2,500 or more, it will generally have to pay provisional tax on the following year's income. Residual income tax is the amount of tax due at the end of the year, after deducting all tax credits the trust can claim (except provisional tax payments).