However, IRD have recently provided definite clarification on this matter. A legislative amendment to HC 27 has been made and a "Commissioner's Operational Position" has been issued.
According to s HC 27(2), a beneficiary who has taken possession and enters into a contract to lend money back to the trust may be deemed a settlor if he or she:
- Contracts to be paid nil or below market-rate interest, or
- Contracts to receive interest but does not make demand for such interest or defers demand, or
- Does not demand repayment of capital.
However, a beneficiary will not become settlor if either:
- The amount owing to them from the trust at the end of the income year is $25,000 or less; or
- The trust pays interest to the beneficiary at a rate equal to or greater than the prescribed IRD interest rate.
If a person becomes a settlor it can lead to unintended tax consequence. The tax position of a trust is based on the tax residency of the settlor. If a deemed settlor becomes a non-resident for tax purposes, the trust will be deemed a foreign trust, resulting in tax complexity and additional compliance obligations.