Trusts and estates: How the trust's income is taxed
New Zealand resident beneficiaries
If you are a New Zealand resident you are liable for New Zealand income tax on all of your beneficiary income, from any source in the world. This will be taxable at your normal income tax rates.
Beneficiaries who are under the age of 16 may be subject to special rules.
The trustee must pay tax on behalf of the beneficiary for the income allocated to them. The beneficiary can then claim a tax credit for the tax paid on their behalf. Beneficiaries are required to return all income received in their own Individual tax return (IR3).
Note: The trustee and beneficiary can agree not to have tax deducted from trust income before the beneficiary receives it. This is called having the income "transferred direct". This may be useful when the beneficiary has tax losses to offset against the trust income. If the income is transferred direct and the beneficiary does not pay any tax on it, the trustees can still be held liable for the unpaid tax.
If you are not a New Zealand resident for tax purposes you only have to pay New Zealand income tax on trust income derived from New Zealand. The trust must deduct non-resident withholding tax from any interest, dividends or royalties before you receive them. This withholding tax is the final tax payable on the income. You should be able to claim a credit for this tax paid in your overseas tax return. Other income, such as income from a rental property, will be subject to New Zealand income tax at the normal rates.
Note: Beneficiary income retains its nature in the beneficiary's hands - for example, if the trust earned the income from dividends, the beneficiary should return it as dividends in their overseas tax return.
If a trust has non-resident beneficiaries, our Non-resident withholding tax payer's guide (IR291) contains information the trust administrators will need to know. You can download a copy or order one by calling our 0800 self-service line on 0800 257 773.
Beneficiaries temporarily ceasing to be resident
If a beneficiary ceases to be a New Zealand resident and then becomes a New Zealand resident again within five years, they must pay New Zealand income tax on any beneficiary income or taxable distributions received from a foreign or non-complying trust (formerly non-qualifying trust). In this situation, any beneficiary income or taxable distributions the beneficiary received while they were a non-resident will be taxable as such in the year in which the beneficiary again becomes a New Zealand resident.
Beneficiaries and provisional tax
If a beneficiary's residual income tax is $2,500 or more, the beneficiary will generally have to pay provisional tax for the following year. Residual income tax is the amount of tax due at the end of the year, after deducting all tax credits the beneficiary can claim, including tax paid by the trustee on the beneficiary's behalf, but excluding provisional tax payments.
Our Provisional tax guide (IR289) explains the provisional tax rules. You can download a copy or order one by calling our 0800 self-service line on 0800 257 773.
Date published: 29 Jun 2010