Offshore Trusts Report: New Zealand
Taxation of Trusts
For income tax purposes, there are three distinct
types of trust: complying trusts (formerly qualifying trusts), foreign
trusts and non-complying trusts (formerly non-qualifying trusts).
This distinction is important, because the type of trust determines
whether some distributions from a trust are taxable.
A complying trust is one which has been taxed in New
Zealand on all its trustee income since the date it began. Complying
trusts settled by New Zealand residents with New Zealand trustees;
estates of people who were New Zealand residents when they died;
other trusts which have elected to become complying trusts.
A trust remains a complying trust if, since settlement
of the trust, the trustees have satisfied all obligations in respect
of its income tax liabilities.
A trust is not a complying trust if:
the only trustee income is non-resident withholding income,
the trustees earn foreign-sourced income excluded from the
meaning of assessable income.
If a trust ceases to meet the conditions for a complying
trust in an income year, it will no longer be a complying trust
- it will generally become a non-complying trust, for example, if
the tax on a complying trust's trustee income is not paid, or if
the trustees cease to be New Zealand residents.
A complying trust will not lose its complying status
simply because one or more of the following apply, as there is no
tax due on trustee income:
the trust has no trustee income<
the only trustee income is tax-exempt
the trust's deductible expenses or losses exceed the trustee
income, so there is no tax payable on the net trustee income.
A trust will be a foreign trust if none of its settlors
have been resident in New Zealand since December 17, 1987 or the
date the trust was first settled, whichever is the later.
A trust will cease to be a foreign trust if it makes
any distribution after a settlor becomes a New Zealand resident,
or if a New Zealand resident makes a settlement on the trust.
A non-complying trust is any trust that is neither
a complying trust nor a foreign trust at the time it makes a distribution.
It is generally a trust that has a resident settlor, has been established
overseas with non-resident trustees, and has not been liable for
New Zealand income tax since it was first settled. It also includes
a trust where its trustee income has been liable to full New Zealand
tax but the trustees have not paid the tax.
Newly-arrived residents in New Zealand who have settled
a trust before they arrived in the country can elect to change a
trust status from a foreign trust to a complying trust by paying
New Zealand income tax on its trustee income within 12 months of
when the settlor first arrives in New Zealand. The trustee income
will then become taxable in New Zealand from the date the trust
makes the election.
If the trust does not make an election, it will be
treated as one of the following:
a foreign trust, for any distribution that consists of income,
capital profits or capital gains derived before the election
a non-complying trust, for any distribution that consists of
income, capital profits or capital gains derived after the election
Beneficiaries who are New Zealand residents are liable
for New Zealand income tax on all their income, from any source
in the world (at progressive rates up to 33%). Beneficiary income
they receive from any trust will be taxable in New Zealand, at their
normal income tax rates.
The trustee must pay tax on behalf of the beneficiary
for the income allocated to them. The beneficiary can then claim
a tax credit for the tax paid on their behalf. Beneficiaries are
required to return all income received in their own Individual tax
Non-resident beneficiaries only have to pay New Zealand
income tax on trust income derived from New Zealand. The trust must
deduct non-resident withholding tax from any interest, dividends
or royalties before they are received. This withholding tax is the
final tax payable on the income. It will normally be possible to
claim a credit for this tax in the country of residence. Other income,
such as income from a rental property, will be subject to New Zealand
income tax at the normal rates.
If a beneficiary ceases to be a New Zealand resident
and then becomes a New Zealand resident again within five years,
they must pay New Zealand income tax on any beneficiary income or
taxable distributions received from a foreign or non-complying trust.
In this situation, any beneficiary income or taxable distributions
the beneficiary received while they were a non-resident will be
taxable as such in the year in which the beneficiary again becomes
a New Zealand resident.
If a beneficiary's residual income tax is NZD2,500
or more, the beneficiary will generally have to pay provisional
tax for the following year. Residual income tax is the amount of
tax due at the end of the year, after deducting all tax credits
the beneficiary can claim, including tax paid by the trustee on
the beneficiary's behalf, but excluding provisional tax payments.
The trustee is liable for New Zealand income tax on
income derived from New Zealand, at a flat rate of 33%, irrespective
of where the trustee resides.
The trustee is also liable for New Zealand income
tax on income derived from outside New Zealand where:
any settlor is resident in New Zealand at any time during the
income year, or
any settlor of an inter vivos or a testamentary trust died
while they were resident in New Zealand, and a trustee is resident
in New Zealand at any time during the income year.
There are two situations in which a trustee is not
liable for income tax on trustee income derived from outside New
Zealand. These apply where the trustee is resident outside New Zealand
at all times during the income year and either:
no settlement has been made on the trust since 17 December
the only settlements made on the trust were by settlors who
were not resident in New Zealand at the time of settlement and
who have not been residents in New Zealand since 17 December
If a trust was settled before 17 December 1987, and
no settlement has been made on the trust since that date, the settlor
is not liable for tax on trustee income unless they elect to pay
tax on it.
If a settlement has been made on a trust since 17
December 1987, any settlor who is a resident in New Zealand at any
time during the income year is liable for income tax on trustee
income as agent of the trustee, subject to certain exceptions. If
there is more than one New Zealand resident settlor, these settlors
are jointly and severally liable for the tax on trustee income.
This means that any or all of the New Zealand resident settlors
are liable for this tax.
The New Zealand resident settlor will not be liable
for the income tax on trustee income if any of these conditions
A trustee is resident in New Zealand at all times during the
The settlor (being a natural person, that is, not a company)
was not a New Zealand resident at the time they made any settlement
on the trust, unless the settlor elects to pay tax on trustee
The settlor can show to Inland Revenue's satisfaction that their
share of the trust's tax liability is excessive, taking into account
the settlements on the trust made by all settlors.
The trustee income is derived by the application of the accruals
rules of the Income Tax Act to any amounts remitted by the settlor
under any financial arrangement.
A trust is also liable for provisional tax if its
residual income tax at the end of an income year is NZD2,500 or