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Income Tax Act 2007

Taxation of certain entities - Trusts

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

You could also call this:

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

When a trustee of a non-complying trust or a foreign trust gives money or assets to a beneficiary, there’s a specific order for how this distribution is treated. Here’s how it works:

First, it’s treated as money the beneficiary should have received last year. Then, it’s treated as money the trust earned this year. After that, it’s treated as money the trust earned in past years. Next, it’s treated as money from selling the trust’s assets this year. Then, it’s treated as money from selling the trust’s assets in past years. Finally, if there’s anything left, it’s treated as the main money of the trust.

You can’t count the same money twice in different distributions. You also have to follow this order strictly, only moving to the next type when you’ve used up all of the previous type.

When figuring out how much money is in each category, you need to subtract any losses or expenses first.

If the trust gives money to one person (let’s call them Person A) that would normally be taxed, but giving it to another person (Person B) would make it not taxed, this is only okay if it’s a real transaction done in good faith and isn’t just moving money around to avoid tax.

There are some cases where these rules don’t apply. For example, they don’t apply to certain types of trusts created by wills or when someone dies without a will. They also don’t apply to some trusts set up by a person who chooses to pay tax in a specific way.

A non-discretionary trust, where the trustee can’t choose how to give out the money, follows different rules.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517294.

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Part H Taxation of certain entities
Trusts

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

  1. This section applies for the purposes of the trust rules when a trustee of a non-complying trust or a foreign trust makes a distribution in an income year to a beneficiary. Subsections (6) and (7) override this subsection.

  2. The distribution is treated as consisting of the following elements in the following order:

  3. first, an amount derived by the trustee that is beneficiary income of the beneficiary in the previous income year:
    1. second, an amount of income that the trustee derives in the income year:
      1. third, an amount of income, other than beneficiary income, that the trustee has derived in an earlier income year:
        1. fourth, an amount that the trustee derives in the income year from the realisation of a capital asset of the trust or another capital gain and that is not income under section HC 15(5B) for the purposes of this section:
          1. fifth, an amount that the trustee has derived in an earlier income year from the realisation of a capital asset of the trust or another capital gain:
            1. last, the corpus of the trust.

              1. In subsection (2),—

              2. an amount must not be treated as included in the distribution if the amount has been treated under this section as being included in an earlier or contemporaneous distribution from the trust:
                1. the paragraphs are applied in order, and the next paragraph applies only to the extent to which the amount of the distribution is more than the cumulative amounts described in that paragraph and the preceding paragraphs.

                  1. For the purposes of subsection (2),—

                  2. in paragraphs (a) and (b), the amount of income is determined after subtracting the amount of a deduction that is taken into account in the income year in the calculation of net or taxable income for the corresponding tax year:
                    1. in paragraphs (c) and (d), the amount is determined after subtracting the amount of a capital loss that the trustee incurs in the income year.

                      1. In the determination of the elements of a distribution to a beneficiary (beneficiary A), no amount of income or capital gain derived by the trustee of the trust is treated as distributed to another beneficiary of the trust (beneficiary B) if the effect is that some or all of the distribution to beneficiary A would be treated as not being beneficiary income or a taxable distribution, unless the distribution to beneficiary B meets all the following requirements:

                      2. it is a genuine transaction entered into and carried out in good faith; and
                          1. it does not itself constitute a settlement.

                            1. This section does not apply to the following distributions which are instead treated as consisting of the amount that reflects the terms of the trust or the terms of the exercise of the trustee’s discretion:

                            2. a distribution by the trustee of a complying trust which is treated as exempt income under section CW 53 (Distributions from complying trusts), unless an election to pay income tax on trustee income has been made for the purposes of section HZ 2 (Trusts that may become complying trusts); or
                              1. a distribution from a non-discretionary trust—
                                1. created by will or codicil, or by an order of court varying or modifying the provisions of a will or codicil; or
                                  1. created on an intestacy or partial intestacy; or
                                    1. on which no settlement has been made after 17 December 1987; or
                                    2. a distribution from a trust, other than a non-complying trust, that is settled by a natural person and for which an election is made under section HC 30(2).

                                      1. This section does not apply to a distribution described in section HC 15(6).

                                      2. In this section, a non-discretionary trust is a trust in relation to which the trustee has no discretion as to the source, nature, and amount of distributions to beneficiaries, including but not limited to the classification of trust property as capital or income.

                                      Compare
                                      Notes
                                      • Section HC 16(2)(aa): inserted, on , by section 138(1) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(2)(a): amended, on , by section 138(2) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(2)(b): amended, on , by section 138(3) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(2)(c): replaced, on , by section 210(1) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                      • Section HC 16(2)(c): amended, on , by section 138(4) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(2)(d): amended, on , by section 138(5) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(5): amended, on , by section 138(6) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(5)(b): repealed, on , by section 138(7) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                      • Section HC 16(6)(c): replaced, on , by section 210(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).