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.
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.
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 trusts and non-complying trusts are taxed only on New Zealand sourced income. A foreign trust will not be required to make an additional disclosure.
Settlors of non-complying trusts with non-New Zealand resident trustees are liable to pay income tax on the trust’s worldwide income as an agent for the trust.
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 as non-active so that you're not required to file an income tax return for it. You can do so if, for an entire tax year, the trust has:
- not derived or been deemed to have derived any gross income from any source
- no deductions
- not been party to, or continued with, any transactions with assets of the trust that give rise to income or deemed income in any person's hand or fringe benefits to any employee or former employee.
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.