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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration when anti-avoidance provision applies

EW 50: Income when debt forgiven to trustee

You could also call this:

“Trust may owe tax when forgiven debt is distributed to non-beneficiaries”

If you have a trust that owes money, and someone forgives that debt, there are some rules about how this works. These rules apply when the trust was set up mainly to help someone the debt-forgiver loves, or to help a charity.

When the trust gives money to someone who isn’t a loved one of the debt-forgiver or a charity, and this happens on or after 20 May 1999, the trust might have to pay tax on that money. The amount of tax depends on how much debt was forgiven.

However, if the trust gives money to another trust that was also set up to help loved ones or charities, these rules don’t apply.

The debt that’s forgiven includes any money that hasn’t been paid yet. It doesn’t matter how the debt is forgiven - it could be in a will or done in another way.

The money given out by the trust is counted as income for the trust, up to the amount of debt that was forgiven. This reduces the total amount of forgiven debt for the trust.

The trust has to report this income in the same year it gives out the money. There are special rules in Section 22B of the Tax Administration Act 1994 that the trust needs to follow.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515359.

Topics:
Money and consumer rights > Taxes
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Part E Timing and quantifying rules
Financial arrangements rules: Consideration when anti-avoidance provision applies

EW 50Income when debt forgiven to trustee

  1. This section applies when—

  2. a trust is a debtor; and
    1. the trust was established mainly to benefit 1 or both of the following:
      1. a natural person for whom the creditor has natural love and affection; or
        1. an organisation or a trust whose income is exempt under section CW 41 (Charities: non-business income) or CW 42 (Charities: business income); and
        2. the creditor is a natural person; and
          1. the creditor forgives the debtor’s debt; and
            1. a trustee of the trust makes a distribution, including a distribution of beneficiary income, to a beneficiary; and
              1. the beneficiary is—
                1. not a natural person for whom the creditor has natural love and affection; and
                  1. not an organisation or a trust whose income is exempt under section CW 41 or CW 42; and
                  2. the distribution is made on or after 20 May 1999.

                    1. This section does not apply when—

                    2. a trust (trust A) is a debtor; and
                      1. trust A was established mainly to benefit 1 or both of the following:
                        1. a natural person for whom the creditor has natural love and affection; or
                          1. an organisation or a trust whose income is exempt under section CW 41 or CW 42; and
                          2. the creditor is a natural person; and
                            1. the creditor forgives the debtor’s debt; and
                              1. a trustee of the trust makes a distribution to another trust (trust B); and
                                1. at the time the distribution is made, trust B is also established mainly to benefit 1 or both of the following:
                                  1. a natural person for whom the creditor has natural love and affection; or
                                    1. an organisation or a trust whose income is exempt under section CW 41 or CW 42.

                                    2. For the purposes of subsections (1) and (2),—

                                    3. the debtor’s debt includes an amount accrued and unpaid at the time of the forgiveness; and
                                      1. the means by which the debt is forgiven, whether in a will or otherwise, is immaterial.

                                        1. The distribution is income of the trustee, under section CC 3(2) (Financial arrangements), to the extent to which it is less than or equal to the total amount of the debts of the trust forgiven to it by the creditor.

                                        2. The distribution is subtracted from the total amount of the debts of the trust forgiven to it by the creditor as the total amount stands at the time of the distribution.

                                        3. The income is derived by the trustee in the income year in which the distribution is made.

                                        4. Section 22B of the Tax Administration Act 1994 applies to a trustee to whom this section applies.

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