OPINION: Income received by the trustees of a trust may be distributed as beneficiary income or retained as trustee income, writes Murray McClennan in Taxing Times.
In making decisions about income distribution or retention the trustees must have regard to the trust deed and trust law.
An issue that I have often wrestled with is whether deemed income recognised for tax purposes can give rise to beneficiary income for income tax purposes. Examples of this include: zUnrealised foreign exchange gains:
- Attributed controlled foreign company income; and
- Foreign investment fund income.
Inland Revenue has recently issued a very comprehensive interpretation statement (IS 12/02) on this issue. The interpretation statement concludes that deemed income is never of itself beneficiary income, but by a combination of the relevant trust deed and the trustees actions, deemed income can in some situations give rise to beneficiary income. For this to be the case, any vesting or payment of deemed income must be effective for trust law purposes to be beneficiary income for tax purposes.
The interpretation statement identifies three separate scenarios:
- The trust deed does not define income;
- The trust deed defines trust law income as income calculated for income tax purposes; and
- The trust deed defines income using trust law concepts of capital and income, but the trustees have the power to distribute trust capital to income beneficiaries.
Under the first scenario trustees cannot distribute deemed income as beneficiary income for income tax purposes. Under the second and third scenarios trustees may distribute deemed income as beneficiary income for income tax purposes.
This issue further highlights the need for trustees to act carefully in administering a trust.
» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm.
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