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 extended to 15 July 2020
Beneficiary income is, by definition (section HC 6 Income Tax Act 2007), an amount which has vested absolutely in the beneficiary within the income year, or an amount paid to the beneficiary 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 beneficiary income had not vested absolutely in the beneficiary in the 2019 income year, to be beneficiary income for the 2019 income year, it would need to have been paid to the beneficiary by the earlier of the date the trust files its tax return or the due date to file that return. If a trust had a tax agent (and therefore an extension of time to file the return) the trust may have had up to 31 March 2020 to make the payment. However, trustees may have missed the 31 March cut-off to make payments to beneficiaries because of COVID-19.
The Commissioner will treat any payment made to a beneficiary on or before 15 July 2020 as being made in time to be beneficiary income for the 2019 income year if the trustees were unable to make payment to a beneficiary by 31 March 2020 because of either COVID-19 or the COVID-19 restrictions put in place by the Government.
Where any such payment is made to a beneficiary, the trustee must advise the beneficiary to ensure that any income tax assessment already made for the 2019 tax year is amended to include the beneficiary income.
If an amount has not absolutely vested in the beneficiary during the 2019 income year, or been paid to the beneficiary by 15 July 2020 then it cannot be treated as beneficiary income for the 2019 tax year and must be declared as trustee income in the Trust’s tax return.
Example: Wilson Family Trust
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.
On seeing that the Commissioner will allow payments made by 15 July 2020 to be treated as beneficiary income, the accountant trustee makes the payments to the beneficiaries on 26 June 2020 as previously resolved. Because the payments have been made by 15 July 2020 and the trustee accountant was unable to make the payments by 31 March 2020 due to COVID-19, the payments can be treated as beneficiary income for the 2019 income year.
The trustee accountant advises and assists the beneficiaries to ensure that their returns for 2019 are amended to include the beneficiary income.