For New Zealand income tax purposes, a trust’s tax residency is based on the settlor’s tax residency. There are three main categorised of trust and they are complying trust, a foreign trust or a non-complying trust. The classification of the trust determines the income tax treatment of any distributions, other than a distribution of beneficiary income which is at marginal tax rate.
Beneficiaries of foreign trust and non-complying trusts may also be taxed on distributions of accumulated income and in some cases on capital gains. The tax position of each category can be explained the following way:
- Complying trusts: all distributions other than beneficiary income are received by beneficiaries tax-free.
- Foreign trusts: all distributions other than beneficiary income, certain arm’s length capital gains and the corpus of the trust are taxed at the beneficiaries’ marginal rates of tax.
- Non-complying trusts: all distributions other than beneficiary income and the corpus of the trust are taxed to beneficiaries at the penal rate of 45%.
There are certain tax planning opportunities and pitfalls to consider when a settlor or beneficiary acquires or loses New Zealand tax residency.