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New Zealand Domiciled Unit Trusts

New Zealand Domiciled Unit Trusts

Unlike most other jurisdictions, unit trusts in New Zealand are taxed in the same manner as companies. Any profit made by the trust is subject to taxation at NZ company rates. (Currently 33%).

This applies irrespective of whether the fund is an income fund such as a mortgage income trust in which all gain (profit) is derived from mortgage interest or a share fund fully invested in listed public companies which have both dividend income and capital gain potential.

Of course expenditure such as management fees and other expenses incurred by the fund are deducted before profit is declared.

What income is taxable?

Basically any interest, dividends or other income earned by the funds is taxable.

What about capital gains?

Those funds which invest in capital growth assets such as shares can be loosely divided into two categories – ‘Passive’ and ‘Active’.

Passive funds tend to be index type share funds and usually have an IRD ruling exempting them from taxation of capital gains.

Active funds include funds which actively trade shares and also include many (most) funds which invest in a number of asset classes ie. shares, bonds property etc.

These funds will pay tax on capital gains – including gains which are ‘unrealised’. They will also be able to deduct any losses (and account for unrealised losses).

Tax credits

NZ unit trusts are able to issue imputation credits to investors for any tax paid by the fund. This includes tax on any capital gains. Imputation credits are issued only when the fund makes a distribution. It is unusual – but not impossible – for a NZ fund to make a distribution that does not carry full imputation credits. ie. if you receive a nett distribution of $67 it will likely also have imputation credits of $33. ($100 less 33% tax). If the distribution does not have full imputation credits, withholding tax will be deducted to increase the total tax credit (imputation and withholding tax) to 33%.

How do I use imputation credits?

For New Zealand tax residents your income tax return form has a ‘box’ in which you enter your imputation tax credits. Including this in your return ensures you pay no more tax than required according to your personal level of income. New Zealand residents are not disadvantaged by investing in NZ unit trusts or companies even if they have a tax rate less than the rate paid by the unit trust or company. For example if you have a marginal tax rate of 19.5% (your income is below $38,000), the extra imputation credits you receive from your unit trust / company investments are used to offset tax payable on other income. This may result in you receiving a refund (depending on the amount of tax you have paid or had deducted from other income sources during the year).

Conversely, if your marginal tax rate is 39%, you will have additional tax to pay in respect of that investment.

NOTE: Under certain criteria, it is optional for many NZ individual investors to make an annual tax return. (It is not optional for companies or trustees or investors who have overseas investments). Investors who receive significant dividend income (from unit trusts or companies) should in fact make a return to ensure they receive the full benefit of imputation credits.

Overseas Tax Residents Please Note: It is unlikely your tax authorities will allow you to use the imputation credits available from NZ unit trust distributions. Please refer to the section for overseas investors.