When a Trust Distributes Income to a Company – How is it Taxed?
When a trust distributes income to a company that is a beneficiary, the way that income is taxed depends on the nature of the company and its relationship with the trust.
The General Rule
If the company is an ordinary beneficiary company (not caught by special rules), the distribution is treated as the company’s income.
The company pays tax at the company tax rate of 28%.
If the distribution comes with imputation or resident withholding tax credits, those credits are passed on to the company in proportion to its share.
The “Close Company” Rule
A close company is one where five or fewer natural persons (or trustees) together hold more than 50% of the company’s voting or market value interests.
This is common in family situations. For example, a company owned by two children is a close company because fewer than five people hold all the shares.
Example: The Children’s Company
Kiri and Manu set up a family trust for their children, who are also beneficiaries of the trust. The trust distributes $50,000 to a company owned by the two children.
Because the children together own 100% of the company, it is a close company under the law.
The children are also beneficiaries of the trust.
This makes the company a “corporate beneficiary” that is closely linked to the trust.
The special corporate beneficiary rule applies. This means:
The $50,000 distribution is treated as trustee income.
The trustee must pay tax at the trustee rate of 39% ($19,500).
The company itself does not pay tax on that income—it is excluded income for the company.
If instead the trust had distributed income to a company that was not a close company (for example, a widely held investment company with many unrelated shareholders), then the company would have paid tax at 28%.
Legislation: See section HC 38 of the Income Tax Act 2007 (corporate beneficiary rule) and section CX 58B (excluded income for companies).
IRD Guidance:
