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Beneficiaries, Settlor; settlors, Trustees, Trusts

Current accounts may make beneficiaries settlors for tax purposes

On 22 December 2014, Inland Revenue released draft Public Ruling PUB0209: “Income tax — whether a beneficiary will be treated as a settlor”.  The Public Rulings consider whether a beneficiary of a trust who has a current account can be a “settlor” of the trust for income tax purposes under s HC 27(2)(a) or (b) of the Income Tax Act 2007.  As trustees of many trusts maintain current accounts for beneficiairies, the scope and significance of this ruling, once finalised, is important as whether a not a person is a settlor can have significance for tax purposes in ways that may not always be appreciated.
Whether a beneficiary will be treated as a settlor where there is no loan
 BR Pub 14/XX applies where the trustees of a trust:
  • vest absolutely in interest an amount in a beneficiary of the trust, or
  • pay an amount to a beneficiary of the trust.

But, the amount is not transferred into the beneficiary’s possession and no interest is paid to the beneficiary on the amount.  There is no loan from the beneficiary to the trustees.

 Where this is the case BR Pub 14/XX concludes that the beneficiary will not be a settlor of the trust. This is because the beneficiary does not receive legal ownership of the amount vested or paid. Without legal ownership the beneficiary is not in a position to provide the amount back to the trustees and, in so doing, trigger the extended definition of “settlor”.
Whether a beneficiary will be treated as a settlor where there is a loan
BR Pub 14/YY differs from BR Pub 14/XX in that the arrangement ruled on in BR Pub 14/YY does involve a loan from the beneficiary to the trust.
BR Pub 14/YY applies where the trustees of a trust:
  • vest absolutely in interest an amount in a beneficiary of the trust, or
  • pay an amount to a beneficiary of the trust.
The amount is not transferred into the beneficiary’s possession, but the beneficiary loans the amount to the trustees.
Either:
  • no interest is charged on the amount by the beneficiary
  • interest is charged on the amount at a below market rate
  • interest is payable on the amount on demand and no demand is ever made, or
  • demand for payment of interest or for repayment of the amount (or both) is deferred so long that the loan is uncommercial.
 Where this is the case BR Pub 14/YY concludes that the beneficiary will be a settlor of the trust under s HC 27(2)(a) or (b).
The deadline for comment on these draft rulings is 5 February 2015. Submissions can be sent to public.consultation@ird.govt.nz
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