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 include:
trusts settled by New Zealand residents with New Zealand trustees;
estates of people who were New Zealand residents when they died; and
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, or
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 expiry date
a non-complying trust, for any distribution that consists of income, capital profits or capital gains derived after the election expiry date.
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 return.
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 1987, or
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 1987.
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 are met:
A trustee is resident in New Zealand at all times during the income year.
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 income.
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 more.
New Zealand News
NZ Foreign Trust Numbers Expected To Fall Tuesday 27/6/2017Fewer than 70 out of 11,645 New Zealand foreign trusts have reregistered following the introduction of tougher disclosure and eligibility requirements, with only three weeks left to go before the final deadline.