Estates and Accounting in New Zealand

In New Zealand, estates and trusts play an essential role in wealth management, succession planning, asset protection, and tax planning. Managing the accounting and tax obligations of both structures requires a solid understanding of local tax legislation, reporting requirements, and allowable expenses. Whether you are a trustee, executor, or beneficiary, complying with Inland Revenue’s rules is crucial for effective financial management.

This article outlines the essentials of accounting for estates and trusts in New Zealand, the types of expenses you can claim, and the tax obligations you must meet under current legislation.

Section 1: Estates in New Zealand

What Is an Estate?

An estate refers to the total net worth of an individual at the time of their death. It includes all assets such as real property, shares, bank accounts, vehicles, and personal belongings. The estate is managed by an executor or administrator, who ensures the deceased’s debts are paid and the remaining assets are distributed to beneficiaries according to the will (or intestacy rules if there is no will).

The Role of an Executor

The executor has several responsibilities:

• Identifying and gathering all assets

• Paying debts and liabilities (including tax obligations)

• Preparing financial statements

• Filing income tax returns for the deceased and the estate

• Distributing the estate to beneficiaries

Accounting and Tax for Estates

1. Final Tax Return for the Deceased

An individual is considered to have a final income tax return from 1 April to the date of death. This return includes all taxable income, such as wages, dividends, rental income, and business income. Any outstanding tax must be paid from the estate.

2. Estate as a Taxpayer

Once the person has passed away, a new taxpayer is created: the estate. This estate remains a taxpayer for as long as it holds income-generating assets.

Estate income must be reported annually, and a separate IRD number is required. Examples of taxable income in an estate include:

• Interest on bank accounts

• Dividends

• Rental income

• Capital gains on property (if the bright-line test applies)

3. Allowable Estate Expenses

The estate can claim deductions for expenses directly related to generating income, such as:

• Accounting and legal fees

• Property management fees (for rental properties)

• Rates and insurance on income-generating properties

• Interest on loans used to fund income-generating assets

• Repairs and maintenance costs

However, personal expenses or costs associated with capital improvements are not deductible.

4. Distribution to Beneficiaries

Once debts are settled, the executor distributes the estate according to the will. Distributions are not taxed in the hands of beneficiaries if the income was previously taxed within the estate.

If income is distributed before being taxed, it is treated as beneficiary income, and the beneficiary will be taxed at their personal rate.

If you are managing a trust or estate, it is highly recommended to consult with a qualified accountant or tax advisor to ensure full compliance and optimal financial outcomes.

Trusts in New Zealand

What Is a Trust?

A trust is a legal arrangement where a person or entity (the settlor) transfers assets to a trustee to manage on behalf of beneficiaries. Trusts are commonly used in New Zealand for asset protection, estate planning, and tax management.

There are different types of trusts, including:

• Family trusts (most common)

• Charitable trusts

• Testamentary trusts (set up via a will)

The Role of a Trustee

A trustee is responsible for managing the trust’s assets and ensuring compliance with legal and tax obligations. Trustees must act in the best interest of the beneficiaries and maintain accurate accounting records.

Financial Statements and Reporting

All trusts must maintain proper financial records, including:

• Annual financial statements

• Minutes of trustee meetings

• Distribution resolutions

• Beneficiary details and disclosures

From 1 April 2021, Inland Revenue introduced stricter reporting requirements for domestic trusts, including:

• A statement of profit or loss

• A statement of financial position

• Details of settlors, beneficiaries, and distributions

These are to be filed along with the trust’s income tax return (IR6).

Taxation of Trusts

1. Trust Income

Trusts are taxed at a flat rate of 33% on all retained income. However, income distributed to beneficiaries during the same tax year is considered beneficiary income and taxed at the beneficiary’s personal rate.

2. Beneficiary Income vs Trustee Income

Trustees must ensure correct allocation and documentation of income to beneficiaries. If incorrectly recorded, distributions may be taxed again or denied as deductible expenses.

3. Common Taxable Income for Trusts

• Rental income from investment properties

• Business income

• Interest or dividend income

• Overseas income (must be disclosed and taxed)

Deductible Expenses for Trusts

To reduce taxable income, trusts can claim allowable expenses, such as:

a. Property-Related Expenses

• Rates and water charges

• Repairs and maintenance

• Insurance

• Interest on mortgages

• Depreciation on chattels

b. Operational Expenses

• Accounting and legal fees

• Trustee meeting expenses

• Bank charges

• Investment advisory fees

• Stationery and postage

Note: Expenses must be directly related to earning income. Costs related to private use or capital improvements are not deductible.

Trust Distribution and Gifting

A settlor can make gifts to the trust, but any gifting must comply with the Insolvency Act and be formally recorded. New Zealand abolished gift duty in 2011, but large or sudden gifts may still raise concerns for creditors or affect eligibility for residential care subsidies.

Trustees may distribute:

• Capital (non-taxable)

• Income (taxed in the hands of the beneficiary)

• Use of trust property (e.g., rent-free living in a trust-owned home—may have tax consequences)

Key Compliance and Record-Keeping Requirements

Both estates and trusts in New Zealand must follow rigorous compliance and record-keeping practices, including:

• Accurate financial statements

• Filing annual tax returns

• Disclosing all distributions

• Documenting all trustee decisions

• Applying the bright-line property rules if applicable

Failure to comply can lead to penalties, reassessments, or loss of tax advantages.

Recent Legislative Changes Impacting Trusts

The Trusts Act 2019, which came into effect on 30 January 2021, brought sweeping changes to trust administration in New Zealand. Key changes include:

• Mandatory duties for trustees (must act honestly, keep records, and act in good faith)

• Beneficiary rights to request trust information

• Maximum duration of a trust extended to 125 years

• Greater transparency and accountability for trustees

These changes require trustees to be more diligent in record-keeping and communication.

Bright-Line Test and Estates/Trusts

The bright-line property rule taxes the gain on residential property sold within a certain timeframe. As of July 2024:

• The 10-year rule applies to most residential properties bought after 27 March 2021

• The 5-year rule applies to new builds

• Main homes are generally exempt

For estates and trusts:

• If the deceased acquired the property and it’s sold within the bright-line period, there may be no tax due if sold by the executor.

• If a trust inherits the property and sells within the bright-line period, the sale may be taxable.

Conclusion

Accounting for estates and trusts in New Zealand involves detailed compliance with taxation and reporting requirements. Whether you’re handling a loved one’s estate or managing a family trust, understanding your obligations ensures you avoid legal and financial pitfalls.

Key takeaways:

• Estates are separate taxpayers from the deceased and must file returns for any income earned.

• Trusts pay 33% on retained income but can distribute income to beneficiaries at their marginal rates.

• Accurate financial records and compliance with the Trusts Act and Inland Revenue requirements are essential.

• Only expenses directly related to income generation are deductible.

• Trustees and executors must act with diligence, transparency, and in the best interests of beneficiaries.

If you are managing a trust or estate, it is highly recommended to consult with a qualified accountant or tax advisor to ensure full compliance and optimal financial outcomes.