Date posted: 6/09/2019 3 min read

Beneficiaries as settlors: updated legislation and Commissioner’s position

Longstanding uncertainty regarding beneficiaries as settlors has now been resolved by a change to legislation and the recent Commissioner’s Operational Position.

In brief

  • Uncertainty regarding whether a beneficiary who leaves distributions in a trust is regarded as a settlor finally resolved
  • Amended rules takes effect from 1 April 2020
  • Inland Revenue will continue to accept the previous public position up to and including 31 March 2020.

Inland Revenue has released the Commissioner's Operational Position – New section HC 27(6) – treatment of a beneficiary as a settlor in certain circumstances. This operational position outlines the legal position the Commissioner considers correct, and the approach the Commissioner will be taking to apply the position in practice.

The issue of when a beneficiary can be treated as a settlor has been a long-term project for the CA ANZ Tax Team, in fact we were still the NZICA tax team when the matter was first raised in 2012. We are pleased that a firm position has been included in legislation and that the Commissioner's position has been published.

The law regarding whether a beneficiary who leaves distributions in a trust is regarded as a settlor has been unclear for a long time (or at the very least, not specifically addressed). As a result, many taxpayers adopted tax positions which may not have aligned with policy intent. Following a long period of engagement, Inland Revenue ultimately proposed a legislative clarification as part of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill (this bill has since been enacted and is the 2019 Act of the same name).

In our submission on the legislative clarification, CA ANZ observed that policy intent of the proposed amendment was contrary to the longstanding positions taken by taxpayers. Given the extensive uncertainty on this issue CA ANZ recommended that a savings provision be included in the legislation provision (this means the change won't affect existing tax positions). The enacted provision does not apply retrospectively.

The Commissioner’s Operational Position

The enacted section of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 amends section HC 17 of the Income Tax Act 2007 and confirms:

that when a beneficiary of a trust is owed an amount by the trust, the beneficiary does not become a settlor of the trust if —

  1. the trustee pays to the beneficiary in the income year interest on the amount owing at a rate equal to or greater than the prescribed rate of interest:
  2. the amount owing at the end of the income year is not more than $25,000.

In response to submissions by CA ANZ and the Law Society, Officials agreed with our recommendation to include a savings provision and further, changed the application date from the date of enactment to 1 April 2020 to enable trustees of trusts with beneficiaries with current account credits to address their position. 

To provide greater certainty and to minimise compliance costs, the Operational Position also sets out that Inland Revenue will continue to accept the existing public position up to and including 31 March 2020.

"The amendment does not come into force until 1 April 2020 and does not apply retrospectively. To provide greater certainty and to minimise compliance, the Operational Position also confirms that Inland Revenue will continue to accept the existing public position up to and including 31 March 2020."

Commissioners Operational Position

New section HC 27(6) – treatment of a beneficiary as a settlor in certain circumstances.

Read more

Related submission

CA ANZ Submission on the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill

Read submission

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