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Trusts and estates: Explaining the important concepts
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.
- A settlement of property on a trust for which the settlor claims a deduction from gross income for New Zealand tax purposes.
Beneficiary income and trustee income
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. Here's how the income is divided:
All income derived by a trustee of the trust during any income year that:
- 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.
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.
If a trust suffers a tax loss that loss can not be passed to beneficiaries to offset against their income, except in limited circumstances. Generally, a trust will have a loss for tax purposes if their income is less than the expenses incurred to earn that income.
As well as these two 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.