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Foreign Trust

A foreign trust can become a non-complying trust when the non-resident settlor becomes a New Zealand tax resident and does not make an election for the trust to be a complying trust. The election must be made within a certain timeframe.

Tax Rates for Non Compliant Trusts

Non-complying trust’s distributions, excluding beneficiary distributions, can be taxed up to 45%, which is significantly higher than the tax rate for complying trust and foreign trust.

If a trust is a foreign trust, additional disclosure may be required where the trust has a New Zealand tax resident trustee.

Potential Dual Tax Issues with NZ Trusts

Potential dual tax status (i.e. foreign trust and complying trust) of a trust can arise where the foreign trust has no New Zealand resident settlors. But the trust is also a complying trust if the trustees have paid tax on all their worldwide trustee income at the rate of 33%. The income tax treatment of a dual status trust and the foreign trust regime should be carefully considered to ensure the correct income tax position is taken and the filing and disclosure requirements are met.

Tax issues can arise when all the settlors of a New Zealand complying trust migrate overseas. Conversely, tax considerations may arise when the settlors of the foreign trust migrate to live in New Zealand.

IRD Voluntary Disclosure Helo

Foreign Trust Compliance for Reduced Tax Burden

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.

Need help meeting your trust's tax obligations?

Have a complying trust, foreign trust or non-complying trust and need assistance?

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  • your trust’s tax status and the income tax treatment of trust distributions;
  • highlight tax issues and opportunities; and
  • how we can add value and assist.
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