Trusts are not treated as separate entities for income tax purposes. There are no rules governing the residence of trusts.
New Zealand trusts are based under a settlor regime. This means that the New Zealand tax treatment of the trust depends on where the settlor is a resident.
Three types of trusts
Complying trusts have a New Zealand resident settlor and New Zealand resident trustees. Complying trusts include testamentary trusts.
Foreign trusts have a non-resident settlor at the time a distribution is made. The distribution from this trust is not taxable if it is:
- of realised capital gains
- the payment out of the corpus of the trust.
Non-complying trusts will occur when a trust was a foreign trust, but the settlor has become a New Zealand tax resident.
Once a settlor from a foreign trust becomes a New Zealand resident, the trust will be treated as a non-complying trust. From here an election to move to a complying trust can be made within 12 months.
During the settlors’ period of transitional residency, the trust is not a foreign trust but is taxed like one for the purposes of trustee income and distributions. If the trustee uses or has previously used the foreign sourced income exemption, it is considered a foreign exemption trust. This means they have disclosure requirements to meet to be able to access the exemption.
Complying trusts must file income tax returns and are required to pay tax on worldwide income less any distributions of beneficiary income. From 1 April 2022 complying trusts have additional reporting requirements.
Foreign exemption trusts
Foreign trusts with a New Zealand resident trustee are known as foreign exemption trusts. This includes trusts where the trustee uses, or has used, the foreign sourced income exemption.
Foreign exemption trusts are required to comply with the New Zealand foreign trust regime to access the foreign sourced income exemption.
Dual status trusts
A trust can be both a foreign trust and a complying trust. In these circumstances the trust is known as a “dual-status trust”.
The trust will be taxed only on New Zealand sourced income provided it has access to the foreign sourced income exemption. The trust will not be required to make an additional disclosure under the domestic regime.
Receiving beneficiary income from a trust
Complying trusts have taxable beneficiary income. This income must be included in a tax return. Distributions are not liable for income tax for accumulated income of the trust.
Foreign trust distributions are not taxable if it is of realised capital gains or payment out of the corpus of the trust. Gains from transactions between associated persons and all other distributions are taxable.
Non-complying trust distributions are subject to full New Zealand tax at a rate of 45%.
Non-active complying trusts
You may want to declare a complying trust (including a testamentary trust) as a non-active trust so that you're not required to file an income tax return for it.
You can declare an estate as non-active if it meets the requirements that a non-active complying trust must meet (described in the section above).
The non-active status can apply from the date the estate became non-active.
Declaring a complying trust or estate as non-active
You can use our form ‘Non-active trust declaration’ (IR633) to tell us your complying trust or estate has become non-active. If your application is approved, income tax returns will no longer be required.