Trusts with all of their benefits and pitfalls are governed by Trust law and its founding documentation, the Trust Deed. How taxation consequences flow from the operation of trusts can be a troublesome area, and specific Trust rules apply for tax.
In today’s world, Trusts are now an area of focus, particularly in the money laundering arena and use of Foreign Trusts, which is adding more and more compliance onto Trust administration.
Late last month IRD released an Interpretation Statement IS 18/01: Taxation of trusts – income tax. The draft statement (PUB00261) was issued mid-2017, so there have been a few issues to work through, and the treatment of trusts with dual status (foreign and complying) has been one of those issues. This interpretation statement is quite an epic read, with all it’s 132 pages, and condenses various old publications, and new compliance requirements for Foreign trusts. It provides a general guide as to how income derived by the trustees of a trust is taxed.
Areas which can create difficulties and included in the Statement are where there are non-residents involved, foreign sourced amounts, income paid to minors, what is a taxable distribution and what is not, the treatment of deemed income, the associated person test, and who is a settlor? All issues that create taxation consequences. There is certainly a heavy focus on Foreign trust consequences, which are certainly now more visible to both IRD and ourselves.
Don’t be put off by the size, this statement appears to be a useful and thorough guide when dealing with Trusts, bringing a lot of old historical information into one place.