Tax on other distributions

Distributions from a trust to beneficiaries that are not beneficiary income are called ‘other distributions’. These can be taxable or non-taxable.

Types of other distributions

Other distributions include:

1. 1. distributions of trust income earned in previous tax years
2. 2. distributions of profits made from selling trust assets
3. 3. gains made by beneficiaries from receiving trust property or services at less than market value
4. 4. gains made by beneficiaries from selling property or services to the trust for more than market value
5. 5. distributions from the trust’s corpus.

These distributions may be taxable or non-taxable. This will depend on the type of trust making the distribution. This is why the difference between complying trusts, foreign trusts and non-complying trusts is significant.

This table shows whether distributions (as numbered above) are taxable (at 45% if the trust is non-complying) or non-taxable.

Complying trusts

All other distributions to beneficiaries from a complying trust are non-taxable. This is the main advantage of complying trusts.

Foreign trusts

If a distribution is taxable:

• trustees must pay income tax on behalf of the beneficiaries
• beneficiaries must return the distribution in their Individual income tax return ─ IR3. They can claim a credit for the tax paid by trustees.

Non-complying trusts

All other distributions to beneficiaries from a non-complying trust are taxable, except for distributions from the trust’s corpus.

Trustees must pay income tax on a taxable distribution for a beneficiary at a rate of 45%. The beneficiary must include the distribution in their Individual income tax return – IR3 but can claim a credit for the tax paid by trustees.

Beneficiary income

In contrast to other distributions, beneficiary income is income earned by a trust and distributed to beneficiaries in the same tax year, or shortly afterwards.

Beneficiary income distributed by all types of trusts is taxable.