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What is trust?

Trust is simply a reference to the property that is owned by a trustee or trustees for the benefit of arranged beneficiaries.

Trustee hold obligation to beneficiaries through property for which is provided by the settlor.

A trust is not a legal person. Meaning that trustee in person is fully liable for any actions as a trustee. Trustee is bound to responsibilities that is being agreed to. They can be sue personally if failure in duty. The fundamental concept of trust is trustee performing defined duties for the benefit of the beneficiaries.

Concept of trust

Very much interesting that trust existed very long since 13th centuries that trust came along where there was an issue in law relating to wills. The issue was that lands are not be bequeath by will. The idea of trust - separating the beneficial and legal ownership – came about that to ensure a legal ownership that escaped the impact of the law of the time, while maintaining a beneficial ownership that met the original landowner’s wishes.

A trust consist of three parties: they are settlors, trustees and beneficiaries. To illustrate – children of aged couples has set up trust as settlors for their parents (beneficiaries) for the purpose of preparing good retirement lifestyle. The children have the option of becoming trustee or to hire a group or a person to manage the administration and legal aspects such as tax matters.

Type of trust

You may have seen many types of trust, trading trust, family trust and business trust etc. But the fact is the trust has no form it is just trust deed which makes it different from each other. As for income tax purposes, the Income Tax Act has classified trust into three category. Trust law is defined in part H: subpart HC (taxation of special entities: trusts) of Income Tax Act 2007

Complying trust (defined in HC 10):

1.Trust set up by NZ resident settlor

2.Trustee income has been subject to NZ tax for every year

3.No trustee income include non-resident foreign sourced income or passive income

Foreign trust:

1.Where trust has not had New Zealand resident settlor at any time since 17 Dec 1987 or the date trust was set up to date of distribution.

2.Foreign trust could have New Zealand resident trustee. For this trust not treated for NZ tax because NZ taxes are based on the residence of the settlor, not the trustee.

Non complying trust:

A non-complying trust is simply a trust that is not a complying trust or a foreign trust.

Examples of a non-complying trust include a trust that:

- resident settlor with non-resident trustees and has not been liable for New Zealand income tax on trustee income since it was first established.

- Complying trust failed to meet its tax obligations.

Settler regime (residency concern)

The residency of settlor determines the types of trust, however when classifying a trust, cares must be taken to accurately identify, because the definition of “settlor” for the trust rules is very wide.

Taxation of trust (trust not tax, but trustee and beneficiaries)

•Trust is not a legal person although this can be registered for GST buy for income tax either trustee of beneficiary get taxed.

•Losses incurred by trust cannot be distributed to a beneficiary they can only be utilised by the trustee against future income.

•Imputation credits allocation is based on proportion to distribution not to beneficiary most able to utilise the credits.

•Change in trustee does not trigger forfeiture of loss

•Minor beneficiary income is taxed as trustee income

oInteresting facts – IRD records show that in the 1999 income year, about 3000 children under that age of 6 received beneficiary incomes more than $21 million in total. This is an average of $7000 income for each child under the age of six and excluding interest and dividend income distributed by trusts.” – (Taxation (Beneficiary Income of Minors, Services-related Payments and Remedial Matters) Bill: Officials’ Report to the Finance and Expenditure Committee on Submissions on the Bill, 19 February 2001, p 5.

oWho is a minor? For the purposes of the rule a minor is defined as a natural person who is a New Zealand resident, and who is less than 16 years old on the balance date of the trust making the distribution of beneficiary income.

•Additional disclosures are required by settlor with no NZ resident trustee or resident trustee of foreign trust.

Taxation of Trust

Above classification is important, as it determines whether distribution is taxable, and if taxable, what tax rate applies. Distribution related questions such as accumulated income, capital gains and corpus are taxable distribution or exempt income to the recipient beneficiaries.

 

Complying trust

Foreign trust

Non-complying trust

Pre-1/4/88 accumulated income

Exempt income

Exempt income

Exempt income

Corpus

Exempt income

Exempt income

Exempt income

Arm’s length capital gain

Exempt income

Exempt income

Taxable distribution taxed at 45%

Non-arm’s length capital gain

Exempt income

Taxable distribution taxed at beneficiary’s marginal rate

Taxable distribution taxed at 45% rate

Accumulated income derived on or after 1/4/88

Exempt income

Taxable distribution taxed at beneficiary’s marginal rate

Taxable distribution taxed at 45%

Trustee income

Taxed at trustee rate (33%)

Income derived from New Zealand taxed at trustee rate (33%).

Taxed at trustee rate (33%).

 

Also read the following article:

http://www.ibbz.co.nz/articles/112-how-to-understand-trust-and-how-it-is-taxed.html