Historically, absent a specific anti-avoidance provision, trustees have been unclear as to whether resident withholding tax (RWT) credits must be allocated in proportion to interest income or if the credits could be “streamed” for better effect.
A recent amendment to the Income Tax Act 2007 has clarified the position and now provides that a trustee can substitute cash distributions to beneficiaries for RWT credits. A trustee who does so is then entitled to a credit to the extent that cash has been substituted for RWT credits.
On first reading the mechanism by which this is achieved in the Income Tax Act is somewhat confusing and reads more like origami instructions. However, perseverance will provide elucidation as to the mechanism, which is demonstrated by this example.
The trustees of the Aspiring Trust derive $100.00 interest income. After payment of resident withholding tax at 33% this equates to $67.00 cash and $33.00 RWT credits.
The trustees resolve to distribute the entire interest payment to Thomas, a beneficiary of the Aspiring Trust who has a marginal tax rate of 17.5%.
The distribution is effected by a $67.00 cash to Thomas from the interest income received by the trustees and a further cash payment (referred to in the legislation as a substitution payment) of $15.50 together with $17.50 (of the original $33.00 RWT credit). The tax on $100.00 for Thomas (given his marginal rate) is $17.50. This means that Thomas receives cash of $82.50 ($67.00 + $15.50) and $17.50 of RWT credits. Accordingly, Thomas has no further tax liability.
The trustees then offset the substitution payment made to Thomas of $15.50 against the remaining $15.50 of RWT credits and are in a revenue neutral position.
- Income Tax Act 2007, s LB 3(1),(4),(5), RE 2(6)
- Vicki Ammundsen, Taxation of Trusts (ed 2), CCH New Zealand Limited 2011 at 15-090