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HC 26: Foreign-sourced amounts: resident trustees
or “When NZ trustees don't pay tax on overseas income”
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“Explanation of who counts as a settlor for a trust”

A settlor of a trust is someone who:

  • Transfers value to the trust, for the benefit of the trust, or on terms of the trust
  • Provides services to the trust for less than market value that are more than just incidental
  • Gives financial assistance to the trust with an obligation to pay on demand, but the right to demand is not exercised or is delayed
  • Is a beneficiary who is owed money by the trustee, unless certain conditions are met
  • Is treated as a settlor under section HC 28

You don’t become a settlor just by being or becoming a beneficiary of a trust.

Some exceptions apply:

  • New Zealand employers setting up retirement trusts for employees are not considered settlors in certain cases
  • Contributing to a foreign superannuation scheme doesn’t make you a settlor
  • New Zealand trustees settling amounts on sub-trusts may not be considered settlors in some situations

There are specific rules about when beneficiaries owed money by trustees become settlors, based on the amount owed and interest paid.

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Next up: HC 28: Activities treated as those of settlor

or “Situations where you might be considered a trust's settlor”
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Part H Taxation of certain entities
Trusts

HC 27Who is a settlor?

  1. Repealed

  2. A settlor of a trust is a person who, at any time,—

  3. transfers value—
    1. to the trust; or
      1. for the benefit of the trust; or
        1. on terms of the trust:
        2. provides, for less than market value, services to the trust or for the benefit of the trust that are more than incidental to the operation of the trust:
          1. provides financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred:
            1. is a beneficiary of the trust who is owed money by the trustee and does not meet the requirements of subsection (6):
              1. is treated as a settlor under section HC 28.

                1. Despite subsection (2), a person resident in New Zealand who makes a settlement on a trust as an employer for the benefit of 1 or more employees is not a settlor of the trust if the following circumstances apply:

                2. the trust is established or created mainly to provide retirement benefits to natural persons; and
                  1. the trust is neither a foreign superannuation scheme nor a superannuation fund.

                    1. Repealed

                    2. Despite subsection (2), a person who makes a contribution to a trust that is a foreign superannuation scheme is not a settlor of the trust.

                    3. Despite subsection (2), a trustee of a trust (the head-trust) who is resident in New Zealand and settles an amount on a second trust (the sub-trust), or makes a distribution to, or on terms of, the sub-trust, is not a settlor of the sub-trust if, when the settlement or distribution is made on or to the sub-trust,—

                    4. a settlor of the head-trust exists and each settlor of the head-trust is a non-resident; or
                      1. no settlor of the head-trust exists and the last surviving settlor of the head-trust was a non-resident when that settlor ceased to exist.

                        1. A person may make a transfer of value, or provision of financial assistance, referred to in subsection (2) directly or indirectly and by 1 transaction or a number of connected transactions.

                        2. The fact that a person is, or will become, a beneficiary of a trust does not constitute the giving or receiving of value.

                        3. When a trustee of a trust owes an amount to a beneficiary of the trust, the beneficiary does not become a settlor of the trust under subsection (2) solely as a result of being owed the amount if—

                        4. the amount owing at the end of the income year is not more than $25,000:
                          1. the amount owing at the end of the income year is more than $25,000 and the trustee pays to the beneficiary, for each income year in which the amount is owing and by the date given for the income year by section HC 6(1B), interest on the amount at a rate equal to the prescribed rate of interest or the market rate.

                            1. For the purposes of subsection (6), the amount of money owing to a beneficiary at the end of an income year is the amount of the debt at that time, adjusted to include the effect of transactions that are—

                            2. made after the end of the income year and by the date given for the income year by section HC 6(1B); and
                              1. included in the financial statements of the trust for the income year.

                                Compare
                                Notes
                                • Section HC 27(1) heading: repealed (with effect on 1 April 2014), on , pursuant to section 186(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                • Section HC 27(1): repealed (with effect on 1 April 2014), on , by section 186(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                • Section HC 27(2)(ab): inserted (with effect on 1 April 2008), on , by section 211(1) (and see section 211(5) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27(2)(ab): amended, on , by section 211(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27(2)(bb): inserted (with effect on 1 April 2020), on , by section 88(1) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27(3): substituted (with effect on 1 April 2008), on , by section 264(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section HC 27(3B) heading: repealed, on , pursuant to section 115(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                • Section HC 27(3B): repealed, on , by section 115(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                • Section HC 27(3C) heading: inserted, on , by section 84 of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                                • Section HC 27(3C): inserted, on , by section 84 of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                                • Section HC 27(3D) heading: inserted, on , by section 211(3) (and see section 211(6) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27(3D): inserted, on , by section 211(3) (and see section 211(6) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27(4): replaced, on , by section 141(1) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section HC 27(6) heading: replaced (with effect on 1 April 2020), on , by section 88(2) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27(6): inserted, on , by section 67(1) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).
                                • Section HC 27(6): amended, on , by section 141(2)(b) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section HC 27(6)(a): replaced (with effect on 1 April 2020), on , by section 88(3) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27(6)(b): replaced, on , by section 141(2)(c) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section HC 27(6)(b): amended (with effect on 1 April 2020), on , by section 88(4) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27(7) heading: inserted (with effect on 1 April 2020), on , by section 88(5) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27(7): inserted (with effect on 1 April 2020), on , by section 88(5) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                • Section HC 27 list of defined terms amount: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
                                • Section HC 27 list of defined terms assessable income: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
                                • Section HC 27 list of defined terms Commissioner: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
                                • Section HC 27 list of defined terms consolidation rules: repealed (with effect on 1 April 2014), on , by section 186(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                • Section HC 27 list of defined terms distribution: inserted, on , by section 211(4) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27 list of defined terms income: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
                                • Section HC 27 list of defined terms income year: inserted, on , by section 67(2) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).
                                • Section HC 27 list of defined terms interest: inserted, on , by section 67(2) of the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 (2019 No 33).
                                • Section HC 27 list of defined terms non-resident: inserted, on , by section 211(4) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                • Section HC 27 list of defined terms prescribed rate of interest: inserted, on , by section 141(3) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                                • Section HC 27 list of defined terms share: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).
                                • Section HC 27 list of defined terms share purchase agreement: repealed, on , by section 115(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                • Section HC 27 list of defined terms trustee: inserted (with effect on 1 April 2008), on , by section 126 of the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 (2009 No 63).