Many family trusts in New Zealand are run informally and while that might have worked in the past, it’s now one of the biggest reasons Inland Revenue takes a closer look. Trustees who delay or skip documenting distributions risk extra tax, lost deductions and unwanted IRD attention.
Let’s look at what counts as a distribution, when it should be documented and how to avoid common traps.
What’s a trust distribution?
A distribution is when trustees decide to transfer trust income, capital or benefits to beneficiaries. It could be a payment, a credit to a beneficiary’s current account or even personal use of trust assets such as a vehicle or holiday home.
From a tax point of view, the key question is when the income stops belonging to the trust and starts belonging to the beneficiary. That timing depends entirely on the trustees’ resolution.
How beneficiary income is treated (IRD)
Timing matters
Trustees still need to decide how trust income will be treated for the year, but the deadline is not simply 31 March. Under section HC 6(1B) of the Income Tax Act 2007, trustees have an extended window to allocate income as beneficiary income. Income can be treated as beneficiary income if it is paid, credited or vested in a beneficiary by the earliest of:
Six months after balance date (for a 31 March balance date this is 30 September), or
- The date the return is filed, or
- The trust’s final filing due date.
For most trusts with a tax agent extension, the filing due date is 31 March of the following year. This means trustees often have until some time between September and the following 31 March, provided the return has not been filed earlier, to sign a resolution documenting distributions.
If no valid resolution exists by the applicable deadline, the income may be taxed as trustee income at 39 percent rather than as beneficiary income, which could be taxed at a lower rate.
Trustee income tax rates (IRD)
Practical tips
- Use written resolutions even if you’re the only trustee. They don’t have to be long, a simple one-line resolution is fine.
- Keep them with your annual trust records, alongside financial statements and any trustee meeting notes.
- Avoid backdating as IRD views that as a red flag. Instead, make it a habit to sign resolutions before your trust’s filing deadline each year.
- Check your trust deed, some older deeds require distributions to follow specific rules or notice periods.
Red flags IRD watches for
- Distributions to beneficiaries who don’t appear to receive any actual benefit.
- Unclear or missing trustee resolutions.
- Income credited to current accounts but never paid.
- Patterns where distributions conveniently match beneficiaries on lower tax rates.
A clear, well-documented paper trail shows the trustees acted properly and with intent, something IRD values highly if your trust is ever reviewed.
Since 2022, Inland Revenue has been taking a closer look at trust reporting. In a future article, we’ll cover what the IRD is looking for and how to stay compliant.