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Income Tax Act 2007

Taxation of certain entities - Trusts

HC 15: Taxable distributions from non-complying and foreign trusts

You could also call this:

“Tax rules for money given out by trusts that don't follow regulations or are based overseas”

When a trust is not following the rules (called a non-complying trust), any money or things it gives to people (called beneficiaries) might be taxed. This is called a taxable distribution. It doesn’t include money that’s already been taxed as income for the beneficiary, or the main assets of the trust, or payments that are just giving out those main assets.

For trusts based in other countries (foreign trusts), the rules are similar. But they also don’t tax money from selling valuable things the trust owns, or from other gains in value. They also don’t tax foreign superannuation withdrawals or pensions.

There are some special rules about how to work out these gains for foreign trusts. If the trust does business with people or companies it’s connected to, some of the gains might still be taxed.

If a trust that’s not following the rules gives things to beneficiaries for less than they’re worth, or helps them with money or services for less than they’re worth, this counts as a taxable distribution.

If a trust that’s not following the rules doesn’t keep good records, everything it gives out might be treated as a taxable distribution.

The law also explains how to work out where the money came from for these distributions, which can affect how they’re taxed.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517290.

Topics:
Money and consumer rights > Taxes
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HC 14: Distributions from trusts, or

“What you get from a trust and when it counts as a distribution”

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HC 16: Ordering rule for distributions from non-complying and foreign trusts, or

“How money and assets from certain trusts are given to beneficiaries”

Part H Taxation of certain entities
Trusts

HC 15Taxable distributions from non-complying and foreign trusts

  1. Subsection (2) applies for a trust that is a non-complying trust at the time a distribution to a beneficiary is made.

  2. The distribution is a taxable distribution to the extent to which it is not a distribution of—

  3. beneficiary income; or
    1. a part of the corpus of the trust; or
      1. a payment or a transaction that represents a distribution of the corpus of the trust.

        1. Subsection (4) applies for a trust that is a foreign trust at the time a distribution to a beneficiary is made.

        2. The distribution is a taxable distribution to the extent to which it is not a distribution of—

        3. beneficiary income; or
          1. a part of the corpus of the trust; or
            1. a profit from the realisation of a capital asset or another capital gain; or
              1. a foreign superannuation withdrawal; or
                1. a pension; or
                  1. a payment or a transaction that represents a distribution of either the corpus of the trust referred to in paragraph (b) or a capital gain referred to in paragraph (c).

                    1. For the purposes of subsection (4)(c),—

                    2. the profit or other capital gain does not include a gain that must be taken into account for the purposes of determining an income tax liability:
                      1. if the trustee is not a trustee of a trust referred to in paragraph (ac), the profit or other capital gain does not include an amount of capital gain (the gain amount) that is derived by the trustee through a transaction or a series of transactions if—
                        1. the transaction or series of transactions is between the trustee and an associated person who is not a natural person or corporate trustee; and
                          1. the gain amount is greater than the capital gain that the trustee would derive from a transaction at market value:
                          2. if the trustee is a trustee of a trust, for which a CFC is a settlor and no person is treated as a settlor under section HC 28(3) or (4), the profit or other capital gain does not include an amount of capital gain that is derived by the trustee through a transaction or a series of transactions between the trustee and an associated person:
                            1. the amount of the profit is determined after subtracting any capital loss that the trustee incurs in the income year in which the amount was derived.

                              1. For a foreign trust, profit described in subsection (5)(ab) or (ac) is income of the trustee for the purposes of section HC 16.

                              2. The source of a capital gain that is included in a taxable distribution is determined for the trustee under section YD 4 (Classes of income treated as having New Zealand source) as if the capital gain were an amount of income.

                              3. The source of a capital loss for the trustee is given by subsection (5C), applied as if the capital loss were a capital gain included in a taxable distribution.

                              4. To the extent to which a distribution is made from a trust that is not a complying trust by disposing of property at less than market value or providing financial assistance or services to a beneficiary at less than market value, the distribution is a taxable distribution and is not subject to the ordering rule in section HC 16.

                              5. If the records of a trust that is not a complying trust do not allow an accurate determination of the elements of a distribution under section HC 16, the distribution is a taxable distribution.

                              Compare
                              Notes
                              • Section HC 15(4)(cb): inserted, on , by section 83(1) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                              • Section HC 15(4)(cc): inserted, on , by section 83(1) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                              • Section HC 15(5)(a): replaced, on , by section 209(1) (and see section 209(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section HC 15(5)(ab): inserted, on , by section 209(1) (and see section 209(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section HC 15(5)(ac): inserted, on , by section 209(1) (and see section 209(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section HC 15(5B) heading: inserted, on , by section 209(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section HC 15(5B): inserted, on , by section 209(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section HC 15(5C) heading: inserted, on , by section 137(1) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15(5C): inserted, on , by section 137(1) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15(5D) heading: inserted, on , by section 137(1) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15(5D): inserted, on , by section 137(1) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15(6): amended, on , by section 137(2) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15 list of defined terms 1973 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section HC 15 list of defined terms 1988 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section HC 15 list of defined terms 1990 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                              • Section HC 15 list of defined terms financial assistance: inserted, on , by section 137(3) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section HC 15 list of defined terms foreign superannuation withdrawal: inserted, on , by section 83(2) of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                              • Section HC 15 list of defined terms income: inserted, on , by section 137(3) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).