My family recently set up a trust to hold some investments and property. I do not understand who pays tax on the income the trust earns, whether it is the trust, the trustees personally or the beneficiaries. Can you explain how trust taxation works?
Trusts are taxed under specific rules in the Income Tax Act 2007. Income earned by the trust that is distributed to beneficiaries in the same year, known as beneficiary income, is generally taxed at the beneficiary's own marginal tax rate. Income that is retained in the trust, known as trustee income, is taxed at the trustee tax rate, and in recent years the top trustee tax rate has been aligned with the top personal tax rate to reduce incentives to shelter income in trusts, so check the current rate that applies for the relevant tax year. Trustees also have separate disclosure obligations to Inland Revenue, including providing financial statements and details of settlements, distributions and beneficiaries for most trusts, following changes that increased trust reporting requirements. Given the complexity and the rate changes, discuss the trust's structure and distribution policy with an accountant each year.
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