TREATMENT OF A BENEFICIARY AS A SETTLOR

On top of the much publicised re-write of the Trust Act, Inland Revenue (IRD) has issued a recent classification in relation to whom is classified as "settlor" of a trust. Section HC 27 of the Income tax act 2007 states a settlor is a person who "transfers value to the trust, for the benefit of the trust or on terms of the trust".

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. 

This new rule becomes effective from 1 April 2020 and does not have retrospective effect.

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.