Distributions from Trusts and GST

When a GST registered trust distributes trust assets to beneficiaries, a GST liability for the trust may result. A registered person needs to charge GST when the person supplies goods or services in the course or furtherance of a taxable activity. What constitutes a “supply” is extremely broad and includes a GST registered trust distributing or giving a trust asset to a beneficiary.  The trust will need to account for GST when the trust has used the asset given to the beneficiary in its taxable activity; the question is to what extent.

For example, the Brown Family Trust is GST registered and owns a house in Queenstown it lets for short-term holiday accommodation through Airbnb. A beneficiary of the Brown Family Trust moves to Queenstown and the trustees of the Trust decide to transfer ownership of the Queenstown house to the beneficiary, who will make it their home.  The transfer of the Queenstown house to the beneficiary will be a supply for GST purposes, and will trigger a GST liability for the Trust based on the market value of the house.

A supply by a trust to a beneficiary is an “associated supply”. This means that although the beneficiary has not paid the trust anything for the property distributed to them, GST legislation treats the trust as having sold the property to the beneficiary for its open market value.  The trust must calculate its GST liability based on this open market value.  This same rule applies where an amount the beneficiary pays is less than the open market value.  There are some specific exclusions from this deeming of an open market value on distributions of trust assets to beneficiaries that may apply in certain situations.

Further, because the distribution is an associated supply, special rules apply for determining when the trust’s liability to account for GST arises. When a trust distributes an asset to a beneficiary there is no payment nor invoice to trigger the GST liability. However, for an associated supply the trust’s GST liability is triggered when the trust makes the property available to the beneficiary or, if the property is moveable, the beneficiary removes the property.

Notwithstanding the above, if the distribution of property was being made to a GST registered beneficiary who was to apply the property to their taxable activity, the outcome could possibly be different.

If your GST registered trust is considering distributing or selling assets to beneficiaries, talk to your Crowe Horwath adviser about what GST liability the Trust may have and options for mitigating any potential liability.

Stephen Richards
Technical Director – Tax Advisory