26/06/2015

Tax risks for trustees

Trustees of New Zealand trusts are personally liable for the debts, unpaid taxes and other obligations of the trust.

All trustees should know their obligations under both trust law and tax law. Trustees need to:

  • Be familiar with and understand the Trust Deed
  • Open a separate bank account for the trust. All trust income should be banked into the account and all trust expenses and distributions should be paid from the account.
  • Ensure that the trust bank account is not used for personal transactions
  • Ensure that all investments are recorded
  • Meet on a regular basis, at least annually, to review the trust investments and the needs of the beneficiaries
  • Be involved in all trust decisions and record their decisions in writing
  • Comply with the legal obligations imposed on trustees
  • Ensure that annual financial statements are prepared
  • Ensure that the trust files tax returns and pays its taxes by the due dates.

Trustees who don’t understand the trust’s tax obligations and record keeping requirements should ask their co-trustees or the trust’s accountant or lawyer.

Income Tax

The trustees can decide whether the income of a trust is to be taxed as beneficiary income or as trustee income. Beneficiary income is taxed at each beneficiary’s personal tax rate. Trustee income is taxed at 33%.

The trustees need to consider the effect that beneficiary distributions have on entitlements such as Working for Families.

Under NZ tax law, beneficiary income must be distributed to the beneficiaries within a specified period. This is the year the income is derived or within twelve months after the end of the year. (Many older trust deeds specify a shorter time limit of six months). The trustees must pass the distribution resolution within the specified period.

Goods and Services Tax (GST)

Trustees must register for GST if the trust carries out a GST taxable activity. Trustees need to know the types of activities that are subject to GST. For example, subdividing land or renting out a holiday home could be GST taxable activities.

A common trap is when the activities of a trust and the use of its assets have changed over time. For example, the family home becomes rented out, or a lifestyle property becomes subdivided and sold. These changes can have income tax and GST consequences which the trustees are personally liable for.

Changing Trustees in a Trust

Proper legal documentation is required for a change of trustees to be effective.

It is important that a trustee who is retiring or resigning notifies the IRD in writing that he or she is no longer a trustee. The GST legislation states that trustees are liable for GST payable by the trust until the date that IRD is advised they have ceased to be a trustee.

Winding-up a trust

Trustees should obtain tax advice before winding up a trust so the tax position can be carefully considered.

The sale or distribution of the income-earning assets of a trust can give rise to income tax liabilities. For example, tax depreciation previously claimed on assets may be recovered. The gains on sale can be taxable in some circumstances.

The trustees must file a final income tax return. The trust must also cancel its registration for GST, PAYE or similar taxes when the final taxes have been paid.

In summary

Trustees should have a basic understanding of the tax rules applying to trusts so they know if the trust is meeting its tax obligations. Trustees should get advice from a tax advisor or an accountant before entering into major transactions.

The trustees should establish clear responsibilities and procedures for complying with the trust’s tax obligations. They should know who is responsible for preparing the tax and GST returns and paying the taxes due. They should ensure that those obligations are being met on an ongoing basis.

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