Deemed Income and Beneficiary Income

The Inland Revenue have issued a draft statement discussing whether it is possible for a trust with deemed income (under the tax legislation) to distribute that deemed income to beneficiaries. Examples of deemed income include FIF income and LTC income.

The matter is not beyond doubt but the Inland Revenue appear to have taken a pragmatic approach and proposed that it is possible for deemed income to become beneficiary income, but only provided that certain requirements are met.

If you are contemplating making distributions of deemed income from a trust, please contact us to ensure that the distribution is effective, as otherwise the income will default to trustee income and be taxed at 33%.

Finance Company Losses

Generally, taxpayers who have suffered losses on investments in failed finance companies cannot obtain a tax deduction for these losses.  However, there are situations where these losses are deductible to taxpayers.

For example, a family trust may have made several loan investments with banks and finance companies.  Some of the finance company loans have become irrecoverable.  The trust can claim the losses as deductible where the trust carries on a business which includes holding loans of this nature.  The business itself could be the lending of money to the banks and finance companies.

It is a question of fact and law whether a taxpayer is in business, but recent case law has suggested that the threshold for trustees to be in the business of lending money is not as high as previously thought.

This ability to claim losses has (unsurprisingly) not been publicised by the Inland Revenue.  However, the ability does exist and we have had success with making these claims.  If you or someone you know has suffered a loss of this nature, we would be happy to discuss these issues with you.

Tax Audits and Voluntary Disclosures

Inland Revenue will often initiate a review of a taxpayer’s affairs, prior to formally commencing an audit.

If you are contacted by the Inland Revenue regarding a review, it is critical that you review your tax affairs to ensure there are no tax liabilities lurking in the past.  If you do consider that there are tax shortfalls owed from the period that the IRD are to review, you should consider making a Voluntary Disclosure prior to the start of any IRD audit.

If you do not make a Voluntary Disclosure and the Inland Revenue assess you for tax shortfalls, shortfall penalties ranging from 20% to 150% can apply.

The main benefits of making a Voluntary Disclosure are that you will not be prosecuted in Court, and the 20% and 40% shortfall penalties do not apply, and the 100% and 150% penalties are reduced by 75%.

If you need assistance with an Inland Revenue review, audit or Voluntary Disclosure, please contact us.