Income Tax Act 2007

HC 16 Ordering rule for distributions from non-complying and foreign trusts
When this section applies

(1)

This section applies for the purposes of the trust rules when a trustee of a non-complying trust or a foreign trust makes a distribution in an income year to a beneficiary. Subsections (6) and (7) override this subsection.

Order of elements of distribution

(2)

The distribution is treated as consisting of the following elements in the following order:

(aa)

first, an amount derived by the trustee that is beneficiary income of the beneficiary in the previous income year:

(a)

second, an amount of income that the trustee derives in the income year:

(b)

third, an amount of income, other than beneficiary income, that the trustee has derived in an earlier income year:

(c)

fourth, an amount that the trustee derives in the income year from the realisation of a capital asset of the trust or another capital gain and that is not income under section HC 15(5B) for the purposes of this section:

(d)

fifth, an amount that the trustee has derived in an earlier income year from the realisation of a capital asset of the trust or another capital gain:

(e)

last, the corpus of the trust.

Order and elements

(3)

In subsection (2),—

(a)

an amount must not be treated as included in the distribution if the amount has been treated under this section as being included in an earlier or contemporaneous distribution from the trust:

(b)

the paragraphs are applied in order, and the next paragraph applies only to the extent to which the amount of the distribution is more than the cumulative amounts described in that paragraph and the preceding paragraphs.

Deductions and capital losses subtracted

(4)

For the purposes of subsection (2),—

(a)

in paragraphs (a) and (b), the amount of income is determined after subtracting the amount of a deduction that is taken into account in the income year in the calculation of net or taxable income for the corresponding tax year:

(b)

in paragraphs (c) and (d), the amount is determined after subtracting the amount of a capital loss that the trustee incurs in the income year.

Transactions that are not genuine

(5)

In the determination of the elements of a distribution to a beneficiary (beneficiary A), no amount of income or capital gain derived by the trustee of the trust is treated as distributed to another beneficiary of the trust (beneficiary B) if the effect is that some or all of the distribution to beneficiary A would be treated as not being beneficiary income or a taxable distribution, unless the distribution to beneficiary B meets all the following requirements:

(a)

it is a genuine transaction entered into and carried out in good faith; and

(b)
[Repealed]

(c)

it does not itself constitute a settlement.

Exclusions: terms of trust

(6)

This section does not apply to the following distributions which are instead treated as consisting of the amount that reflects the terms of the trust or the terms of the exercise of the trustee’s discretion:

(a)

a distribution by the trustee of a complying trust which is treated as exempt income under section CW 53 (Distributions from complying trusts), unless an election to pay income tax on trustee income has been made for the purposes of section HZ 2 (Trusts that may become complying trusts); or

(b)

a distribution from a non-discretionary trust—

(i)

created by will or codicil, or by an order of court varying or modifying the provisions of a will or codicil; or

(ii)

created on an intestacy or partial intestacy; or

(iii)

on which no settlement has been made after 17 December 1987; or

(c)

a distribution from a trust, other than a non-complying trust, that is settled by a natural person and for which an election is made under section HC 30(2).

Exclusions: taxable distributions

(7)

This section does not apply to a distribution described in section HC 15(6).

Meaning of non-discretionary trust

(8)

In this section, a non-discretionary trust is a trust in relation to which the trustee has no discretion as to the source, nature, and amount of distributions to beneficiaries, including but not limited to the classification of trust property as capital or income.

Defined in this Act: amount, beneficiary income, complying trust, corpus, deduction, distribution, exempt income, foreign trust, income, income tax, income year, net income, New Zealand resident, non-complying trust, non-discretionary trust, settlement, tax year, taxable distribution, taxable income, trust rules, trustee, trustee income

Compare: 2004 No 35 s HH 6(1), (2), (4)

Section HC 16(2)(aa): inserted, on 23 March 2020, by section 138(1) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(2)(a): amended, on 23 March 2020, by section 138(2) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(2)(b): amended, on 23 March 2020, by section 138(3) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(2)(c): replaced, on 18 March 2019, by section 210(1) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).

Section HC 16(2)(c): amended, on 23 March 2020, by section 138(4) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(2)(d): amended, on 23 March 2020, by section 138(5) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(5): amended, on 23 March 2020, by section 138(6) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(5)(b): repealed, on 23 March 2020, by section 138(7) (and see section 138(8) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).

Section HC 16(6)(c): replaced, on 18 March 2019, by section 210(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).