We understand that the COVID-19 outbreak has meant major disruption for our customers. One situation where there may be tax implications is where the payment of beneficiary income is interrupted by COVID-19.
Beneficiary distributions due by 31 March 2020
Beneficiary income is, by definition (section HC 6 Income Tax Act 2007), an amount which has vested absolutely to the beneficiary within the income year, or by the later of either:
- a date within six months of the end of the income year
- the earlier of either:
- the date on which the Trust files its tax return
- the due date of the Trust’s tax return.
If an amount has not absolutely vested to the interest of the beneficiary by 31 March 2020 (at the latest) then it cannot be treated as beneficiary income for the 2019 tax year and must therefore be declared as trustee income in the Trust’s tax return.
Wilson Family Trust is a trust with three beneficiaries to which it usually distributes some beneficiary income every year. The trustees resolved to distribute income to each of the beneficiaries for the year ended 31 March 2019. The trustees of the Wilson Family Trust are required to make these distributions to the beneficiaries before 31 March 2020 when they file the 2019 trust tax return (which has an extension of time).
In February 2020, one of the trustees (Wilson Family Trust’s accountant) remembered that the Trust needed to ensure payment was made to the beneficiaries before the tax return was filed on 31 March 2020. The accountant trustee made a note in her calendar, reminding her to follow up with the other trustees who had forgotten about allocating any income to the three beneficiaries for 2019.
However, since then the impact of COVID-19 has led to significant delays in the ability of the Trust’s accountant to access information regarding the Wilson Family Trust from the other trustees. Additionally, the accounting firm was closed during the level four lock-down and was unable to file the Trust’s 2019 tax return by 31 March 2020. As a result, no distributions were made to beneficiaries of the Wilson Family Trust by the 31 March due date.
Although the Wilson Family Trust will be able to file its 2019 tax return late with any late payment penalties waived, there is no discretion for a late distribution of beneficiary income. As a result, all income of the Wilson Family Trust for the 2019 income year will be taxable as trustee income.