1.2 Trust income which vests in or is distributed to beneficiaries is termed "beneficiaries' income". By "trust income" we mean income which is not vested or distributed and therefore belongs to beneficiaries, defined or undefined, whose interests will crystallise only in the future. 1.3 Though there is no present beneficiary in whose hands trust income can feasibly be taxed, the objective of the international tax reforms require that the income be taxed on an annual basis. The issues are therefore: a when should trust income be subject to New Zealand tax; and b who should bear the liability for the tax? 2 Residence and Taxpayer 2.1 For individuals and companies, the first question is answered in terms of residence and source. The international regime extends this basic structure by attributing to New Zealand resident shareholders a share of the taxable income (including non-New Zealand source income) derived by non-resident companies. 2.2 In the Committee's view, the taxation of trusts should follow that of individuals and companies by developing rules for the residence of trusts. 2.3 Determination of residence defines the income to be taxed (worldwide income or source income). A closely related but separate issue is the identification of the taxpayer. It is desirable for practical and philosophical reasons that, wherever possible, the recipient of the income should be the taxpayer. If this is not possible, the residence of the taxpayer and the income recipient should be the same, since residence is a key criterion for determining the amount of income which is taxable. Failing that, for enforcement reasons, the taxpayer must be a person who is resident. 2.4 The only candidates for payers of tax on trust income are the trustees and the settlor. There is a good case for levying tax on the trustees: they are the legal owners of the income, they have the power of disposition over it and therefore the ability to pay tax from trust funds. The settlor has none of these and ordinarily could not oblige the trustees to meet what would be his or
1.2 Trust income which vests in or is distributed to beneficiaries is termed "beneficiaries' income". By "trust income" we mean income which is not vested or distributed and therefore belongs to beneficiaries, defined or undefined, whose interests will crystallise only in the future. 1.3 Though there is no present beneficiary in whose hands trust income can feasibly be taxed, the objective of the international tax reforms require that the income be taxed on an annual basis. The issues are therefore: a when should trust income be subject to New Zealand tax; and b who should bear the liability for the tax? 2 Residence and Taxpayer 2.1 For individuals and companies, the first question is answered in terms of residence and source. The international regime extends this basic structure by attributing to New Zealand resident shareholders a share of the taxable income (including non-New Zealand source income) derived by non-resident companies. 2.2 In the Committee's view, the taxation of trusts should follow that of individuals and companies by developing rules for the residence of trusts. 2.3 Determination of residence defines the income to be taxed (worldwide income or source income). A closely related but separate issue is the identification of the taxpayer. It is desirable for practical and philosophical reasons that, wherever possible, the recipient of the income should be the taxpayer. If this is not possible, the residence of the taxpayer and the income recipient should be the same, since residence is a key criterion for determining the amount of income which is taxable. Failing that, for enforcement reasons, the taxpayer must be a person who is resident. 2.4 The only candidates for payers of tax on trust income are the trustees and the settlor. There is a good case for levying tax on the trustees: they are the legal owners of the income, they have the power of disposition over it and therefore the ability to pay tax from trust funds. The settlor has none of these and ordinarily could not oblige the trustees to meet what would be his or
1988-other-international-tax-report-part-1.docx