Tax on beneficiary income

If you’re getting money from a trust that’s based in New Zealand, the trustees will normally have taken care of the tax before they pay you.

You’ll need to include your beneficiary income and any tax credits in your Individual income tax return ─ IR3.

Because only trustees can deduct expenses from a trust’s income, a trustee cannot allocate a loss (a situation where your expenses are more than your income) to a beneficiary.

Paying tax on beneficiary income

In most cases, any tax you pay on your beneficiary income will be at your personal income tax rate. Special rules apply for beneficiaries under the age of 16 and corporate beneficiaries.

When a distribution from a trust to a beneficiary is taxable, both trustees and beneficiaries have tax obligations.

All beneficiary income is taxable and some ‘other distributions’ are taxable too.

What trustees need to do

Trustees must pay income tax on behalf of the beneficiary. In taxing a distribution, the trustee must follow a 4-step process.

The trustee must pay tax of D to us.

What beneficiaries need to do

You must return the distribution in your Individual income tax return ─ IR3. Details should include credits for tax withheld from interest distributed or imputation credits for dividends distributed. If trustees have paid the beneficiaries’ tax on income from the trust, you can claim a credit for the tax paid.

If you receive some of a trust’s income and the trust got it from a source that earned tax credits, you should get the same share of the tax credits as you do of the income.

Beneficiaries under the age of 16

Beneficiaries under the age of 16 are known as minor beneficiaries.

If your trust has been settled by a relative or someone with legal guardianship of a minor beneficiary, any income the trust distributes is taxed differently. If your trust distributes income to a minor beneficiary, that income is usually taxed as trustee income at the rate of 39%, not as beneficiary income.

There are a few exceptions.

• The trust distributes $1,000 or less to the minor beneficiary in a tax year.
• The minor beneficiary is getting a disability allowance or a child disability allowance (or their parent or guardian is receiving this on the child’s behalf).
• The trust exists to handle a deceased person’s estate.
• The income comes from a Māori authority.
• The trust is a disabled beneficiary trust.

Trustee income tax rates

Corporate beneficiaries

If a company is a beneficiary of a trust they are known as a corporate beneficiary.

In most situations, if a company is the beneficiary of a trust, any income is taxed at the company’s tax rate. However, if your company is a close company, income may be taxed at the trustee income tax rate of 39%.

Your close company’s beneficiary income may be taxed at the trustee income tax rate if a settlor of the trust is any of these.

• A shareholder in the close company.
• A relative of a shareholder of the company.
• Married to a shareholder of the company.
• In a long-term relationship to a shareholder of the company.
• A close friend of a shareholder of the company.

The trustee income tax rate does not apply if the trust was settled for handling debt securities, known as securitisation trusts.

Exceptions to the corporate beneficiary rule

The corporate beneficiary rule will not apply to foreign sourced income earned by non-resident companies with no New Zealand shareholders.

The corporate beneficiary rule will also not apply to a trust’s dividend income if the payer of the dividend is a New Zealand tax resident and the payer of the dividend and the recipient of the beneficiary income are both companies in the same wholly owned group.

From 1 April 2024, distributions to corporate beneficiaries of exempt income of the trust may no longer be excluded from the corporate beneficiary rule. For example, foreign sourced income or non-resident settlor income may be exempt income for the trust, but the corporate beneficiaries may be taxed on the distributions they receive.

If you are a corporate beneficiary, you may sometimes have distributions that fall under the corporate beneficiary rule, and others that do not. The trust return needs to be completed in a specific way to ensure both kinds of distributions are taxed correctly.

More information is in our guide Trusts and estates income tax rules ─ IR288.

Related information

Trusts and tax residency

Tax Technical advice

Read the Special Report: 39% Trustee Tax Rate on our Tax Policy website.

Special Report: 39% Trustee Tax Rate