Talking Tax: Chris Lindsay, Lindsay Tax Solutions
Is Your Trust a Tax Time-Bomb?
This regular column is provided by Chris Lindsay (B.Com CA), a Director at Lindsay Tax Solutions Ltd. Chris is a Chartered Accountant and tax specialist based on the North Shore. Chris has worked in the tax field for over 20 years and advises businesses on a range of tax issues including structuring when buying and selling businesses, handling IRD audits, expanding overseas and reviewing existing structures.
Trusts are popular. However, they are not always well managed and even simple mistakes or oversights can lead to serious tax consequences. This article briefly examines some of the common (and not so common) Trust tax issues:
Trusts are generally required to file tax returns. A trust that has sold a house, or received debt forgiveness amounts, takes a tax position regarding whether these transactions are taxable. As such, the trust should file a tax return even if only to show that the amounts are non-taxable. If a trust does not file a tax return, adverse tax implications can arise including:
- The 4 year time limit restricting the IRD from increasing the Trust’s tax does not apply i.e. the IRD could reassess tax from 20 years ago. If the Trust made a capital gain, or received debt forgiveness amounts in the past which are liable for tax, then the 4 year time-bar would not stop the IRD collecting the tax.
- The Trust’s tax status could change to a Non-Complying Trust, which results in distributions of accumulated profits and gains being taxed at 45% (instead of no tax on these amounts!)
- The trustees could be prosecuted by the IRD for failing to file tax returns.
As individual trustees are personally liable for trust debts, using a company to act as trustee (with individuals as Directors) effectively removes that personal liability.
If a trust has received debt forgiveness amounts in the past and treated these as exempt from tax, the trust will generally be liable for tax on any amounts distributed to companies up to the level of debt forgiveness amounts received.
If you resettle or wind up a trust, that will usually trigger taxable events including:
- Tax losses and imputation credits can be lost in companies the trust owns shares in
- Depreciation recovered on rental properties transferred
- Distributions of accumulated profits and gains could be taxed again, unless the trust is a “Complying Trust” i.e. always complied with its tax obligations and met certain other criteria
- Transfers of property can be taxed in certain situations.
Income distributions to beneficiaries aged under 16 are taxed at 33%, unless the amount is $1,000 or less i.e. they cannot be taxed at the beneficiaries’ lower tax rates.
If trustees move overseas, the trust is likely to become a Non-Complying Trust i.e. subject to the harshest tax rules. Also, the trust may become liable to tax in the overseas country because the trustees are based there.
If you have an interest in an overseas trust, distributions from that trust are generally taxable in New Zealand
If you would like to discuss this issue, or any tax issue, please contact Chris Lindsay on firstname.lastname@example.org or 021829400 and I would be happy to discuss on a no obligation basis.