Family trusts are one of the most common asset-holding structures in New Zealand — used for asset protection, estate planning, and income distribution. But trusts have specific tax rules that every trustee needs to understand, including the trustee tax rate and how distributions to beneficiaries are taxed.
Trust income taxed in the hands of the trustee is taxed at 33% (or 39% from 2025 for trusts with income over $10,000 in certain circumstances). However, if income is distributed to beneficiaries, it is taxed at the beneficiary's personal rate — which may be lower. The trust files an IR6 return each year. Income splitting through trusts is legitimate but must be genuine — IRD scrutinises trusts that distribute primarily to low-income beneficiaries.
Types of Trust Income
Trust income is classified as either:
- Trustee income: Income retained in the trust and not distributed to beneficiaries. Taxed at the trustee rate (33% or 39%).
- Beneficiary income: Income distributed to, or set aside for, beneficiaries. Taxed at the beneficiary’s personal tax rate.
Trustees decide each year how much income to distribute and to whom — subject to the trust deed and any legal constraints.
Trustee Tax Rates 2025–26
From the 2024–25 income year, new rules apply to trusts:
| Trust situation | Tax rate |
|---|---|
| Trustee income — most trusts | 39% (increased from 33%) |
| Trustee income — deceased estates (years 1–3) | 33% |
| Trustee income — certain charitable trusts | 0% (tax-exempt) |
| Trustee income — testamentary trusts | 33% |
| Beneficiary income distributed in the year | Beneficiary’s personal rate |
Key change: The trustee rate increased to 39% from 1 April 2024 to align with the top personal income tax rate and reduce the incentive for income sheltering in trusts. This significantly changed the tax efficiency of retaining income in a trust rather than distributing it.
How Beneficiary Income Is Taxed
When a trustee resolves to distribute income to a beneficiary, that income is taxed at the beneficiary’s personal marginal rate:
Example:
- Trust net income: $60,000
- Trustees distribute $30,000 to spouse (earns $20,000 from employment — marginal rate 17.5%)
- Remaining $30,000 retained in trust (taxed at 39%)
Tax on distributed $30,000:
- Spouse’s total income: $20,000 + $30,000 = $50,000
- Tax at up to 30% marginal rate
This income-splitting can save meaningful tax compared to the settlor (trust creator) being taxed at 33–39% on the same income.
Beneficiary Income Must Be Set Aside in the Year
To qualify as beneficiary income for a tax year, the income must be resolved or set aside by the trustees before the end of the income year (or shortly after — in practice, by 31 March with specific intent). If trustees fail to resolve distributions before year-end, the income defaults to trustee income at 39%.
Work with your accountant before 31 March each year to decide on distributions.
The IR6 Trust Tax Return
All trusts that derive income must file an IR6 (Return for Trusts) each year. The IR6:
- Reports total trust income (from all sources)
- Identifies how much is trustee income and how much is beneficiary income
- Shows which beneficiaries received income and their IRD numbers
- Calculates the trustee tax payable
Due date: Same as other IR returns — 7 July (no agent) or extended with a tax agent.
The IR6 is complex — most trusts use an accountant for this.
Trust Deductions
Trusts can deduct expenses incurred in deriving income:
- Interest on loans used to acquire trust assets
- Property maintenance (for rental income)
- Accounting and legal fees
- Investment adviser fees
Trustee expenses (administering the trust itself) may or may not be deductible depending on whether they relate to income-earning activities. Personal and administrative costs are generally not deductible.
Minor Beneficiaries (Children)
Income distributed to beneficiaries under 16 (minor beneficiaries) from a trust is taxed at the trustee rate (39%) — not at the child’s personal rate. This prevents trusts from being used to funnel income to children at low or zero tax rates.
This rule means distributing trust income to your children for tax purposes is not effective in NZ.
IRD’s Increased Scrutiny of Trusts
Since the trustee rate increased to 39%, IRD has focused more attention on trusts:
- Trusts are now required to provide more disclosure in the IR6 (including details of settlors, trustees, and beneficiaries)
- IRD may investigate trusts where distributions appear to lack commercial substance
- Genuine family trusts with legitimate distributions are fine — but ensure documentation is clean
Frequently Asked Questions
What is the difference between a settlor, trustee, and beneficiary?
- Settlor: The person who established the trust and transferred assets into it
- Trustee: The person(s) who legally own and manage the trust assets
- Beneficiary: The person(s) who benefit from the trust — they receive distributions
Can the settlor also be a trustee and beneficiary?
Yes — in NZ family trusts, the settlor is commonly also a trustee and a discretionary beneficiary. This is lawful but may affect the trust’s asset protection effectiveness in certain legal situations.
Is trust income subject to GST?
If the trust conducts a taxable activity (e.g., a trading trust), it may need to register for GST. Passive investment trusts (holding property, shares) typically do not register for GST unless rental income exceeds the $60,000 threshold.
How do I wind up a family trust and what are the tax implications?
Winding up a trust can trigger tax on accumulated income and capital gains events on asset transfers. Get specialist legal and tax advice before winding up a trust.