Trust distributions, minor beneficiary rule and trustee rate
Te Rangi Whānau Trust has trustee income of $150,000 from a commercial rental property for the year ended 31 March 2025. The trustees are considering distributions to three beneficiaries. Mia is 17 and has no other income. Josh is 22, a full-time student with $8,000 of part-time income. Nan is 68 and receives NZ Superannuation of $28,000. The trustees propose distributing $20,000 to Mia, $30,000 to Josh, and retaining $100,000. The trust deed allows distributions to any beneficiary. The trustees are all on the 39% marginal rate and want to minimise tax while retaining funds for a future capital purchase. The trust is not a superannuation fund or a charitable trust. The trustees have no other income.
1. Calculate the tax under the proposed distributions, applying the minor beneficiary rule.
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Trustee income is $150,000. Distributions to beneficiaries are deductible from trustee income and taxed to the beneficiaries. Mia is 17, so the minor beneficiary rule applies. Her $20,000 is taxed at the trustee rate of 39%, giving $7,800. Josh is 22, so ordinary marginal rates apply. His total income is $30,000 + $8,000 = $38,000. Tax is $1,638 on the first $15,600, plus 17.5% on $22,400 = $3,920, totalling $5,558. The retained trustee income is $100,000, taxed at 39% = $39,000. Total tax is $7,800 + $5,558 + $39,000 = $52,358.
2. Would distributing $30,000 to Nan instead of retaining it reduce tax? Quantify.
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Yes. If the trustees distribute $30,000 to Nan, her total income becomes $28,000 + $30,000 = $58,000. Tax is $1,638 + 17.5% × $37,900 = $6,632.50, plus 30% × $4,500 = $1,350, totalling $9,620.50. Trustee income falls to $70,000, taxed at 39% = $27,300. Mia still pays $7,800 and Josh $5,558. Total tax becomes $27,300 + $7,800 + $5,558 + $9,620.50 = $50,278.50. The saving is $52,358 − $50,278.50 = $2,079.50. The distribution to Nan uses her lower marginal rates, but the trustees must consider whether it is consistent with the trust deed and the capital objective.
3. What non-tax factors should the trustees weigh before changing the distribution?
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The trustees must act within the trust deed and for the benefit of the beneficiaries. A distribution to Nan may be appropriate, but the trustees should consider Nan's circumstances, any family expectations, and whether the capital purchase objective is compromised. They should also consider the sustainability of distributions and whether the trust needs to retain cash for the commercial property. The minor beneficiary rule makes distributions to Mia expensive, so the trustees should not assume a distribution to her is tax-efficient. They should record the reasons for the distribution decision and review the trustee rate exposure on retained income.