Tax Updates: 28 August 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Taxation of Trusts

It seems only yesterday that Inland Revenue issued the original Taxation of Trusts interpretation statement, but it was actually in 2018. It’s time for an update, therefore, which is presently issued in draft with the reference PUB00375, and has an accompanying reading guide that summaries the main differences to IS 20/18 as being:

Settlors

• A person who provides services to a trust for less than market value does not become a settlor unless the services are “more than incidental”.
• A beneficiary does not become a settlor if they are owed $25,000 or less at the end of an income year.
• Remedial changes have been made to the definition of “transfer of value”.
• The definition of “financial assistance” has moved and been changed to clarify that it involves a transfer of value.
• A method for valuing financial assistance has been provided.
• A person can transfer value or provide financial assistance directly or indirectly, resulting in them becoming a settlor.
• Whether a gift is a transfer of value for the purpose of the trust rules is not affected by the market value rules.
• A NZ resident trustee is not generally treated as a settlor of a sub-trust if all the settlors of the head-trust are non-resident.
• A timing issue has been clarified as to when a person is treated as a settlor if they use a company to settle an amount on a trust.

Trustee income

• Where a settlement is excluded from corpus and taxed to the beneficiary, it is not included in trustee income.
• A NZ resident trustee is assessable on foreign-sourced amounts if the last surviving settlor was a corporate resident here when it ceased to exist.
• The exemption for foreign-sourced amounts received by resident trustees applies if those amounts are trustee income.
• The exemption for foreign-sourced amounts received by resident trustees does not apply if an election has been made to pay tax on worldwide income.
• The exemption for foreign-sourced amounts received by resident trustees does not apply if the beneficiary income of a minor has been treated as trustee income.

Distributions

• Interest paid by a trustee to a beneficiary on current accounts is not a distribution if it is calculated at either the market or prescribed rate.
• Financial assistance provided to a beneficiary for less than market value is not subject to the ordering rules.
• Whether a distribution has been made to a beneficiary is determined by the actual value transferred and not the market value rules.
• The types of capital gains that a foreign trust can distribute tax-free have been expanded to include distributions of assets in specie to beneficiaries.
• The source of a capital gain or loss for a trustee is determined under the source rules as if the capital gain were an amount of income.
• When a trustee treats multiple settlements as being on one trust, the value of corpus is the aggregate amount of the settlements.
• The first ordering rule determining the make-up of a distribution is now prior year beneficiary income.
• When considering whether the elements of a distribution should be reordered, it is no longer a requirement that the distribution has been placed beyond the trustee’s control.

Transitional issues when change of residence

• Parts 10 and 11 of the draft statement (dealing with transitional issues for settlors, trustees and beneficiaries changing their country of residence) have been completely rewritten; and,
• Elections and voluntary disclosures can now be made so that a trust can be treated as a complying trust, which is especially relevant for settlors changing residence.

Compliance

• The definition of resident foreign trustee now includes trustees for charitable entities, resulting in a requirement to comply with the foreign trust disclosure rules.
• The foreign trust disclosure rules have been amended and now apply to “foreign exemption trusts”.
• Disclosure rules for domestic trusts have been introduced.
• Estates can now claim non-active status.
• The criteria for claiming non-active status have widened.
• Where the imputation credit anti-streaming rule applies, a beneficiary only needs to include the reduced credit in their income.
• A trustee as agent for a beneficiary can retain the benefit of RWT credits to satisfy the income tax liability of the trustee on trustee income and/or reallocate the credits to another beneficiary.
• With the introduction of an online register, the definition of RWT exemption certificates has been repealed and replaced with the term “RWT-exempt status.
• Payers of passive income, including trustees, must keep certain records.

If you would like to provide feedback on PUB00375, the closing date for submissions is 13^th October 2023.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.