NEW ZEALAND Law and Practice Contributed by: Violet Yu, Jonathon Russell and Sandy Chen, Cone Marshall Limited
3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions In New Zealand, tax consequences for residents involved with trusts will depend on the trust’s sta - tus (complying, foreign or non-complying) under the Income Tax Act 2007. As a fiduciary (trustee), the following tax consequenc - es may apply. • Foreign trust – No tax on foreign-sourced income if registered with Inland Revenue within 30 days and compliant with disclosure (Tax Administration Act 1994, Section 59C). New Zealand-sourced income is taxed at 39%. • Risk – A settlor becoming a New Zealand resident makes the trust non-complying unless elected as complying within 12 months, taxing distributions at 45%. The transitional residency exemption has the follow - ing effect. • New Zealand’s four-year transitional residency peri - od allows a new resident settlor to maintain foreign trust status temporarily, delaying tax on worldwide income. Within 12 months of residency, the settlor can elect for the trust to become a complying trust to avoid non-complying status and 45% distribu - tion tax. As a beneficiary, the following tax consequences may apply. • Income distributions are taxed at the beneficiary’s marginal rate (between 10.5% and 39%). Capital/ corpus distributions are tax-free (no general capital gains tax). Non-complying trust distributions face 45% tax. Offshore investments over NZD50,000 may trigger Foreign Investment Fund (FIF) tax (5% imputed income). In response to the above-mentioned tax consequenc - es, below are some planning opportunities to con - sider.
• Trustee tax rate increase (April 2024) – The rate was raised from 33% to 39%, aligning with the top personal tax rate. The higher taxation encourages income to be distributed to lower-taxed beneficiar - ies (rather than retained, taxed at 39% and added to the trust corpus). • Enhanced disclosure rules (2021–22) – Trusts must file detailed financial statements and beneficiary information (eg, settlor details, distributions). The changes largely maintain the protection offered by trusts, but increase the administrative and compli - ance burden. 3.2 Recognition of Trusts Trusts are recognised and respected in New Zealand as an established structure for estate planning and asset protection, governed by the Trusts Act 2019. They are commonly used for: • succession planning purposes (particularly given the rise of second/third marriages and blended families); and • safeguarding family assets from third-party credi - tors and business risk. Unlike companies, trusts are not legal persons; they are fiduciary relationships where trustees legally own and manage assets for the benefit of the beneficiar - ies, in accordance with the terms of the trust deed. The separation of legal and beneficial ownership is a cornerstone of their protective function, and is rec - ognised and understood by New Zealand courts and legislation. The Supreme Court in Regal Castings Ltd v Light- body [2008] NZSC 87 affirmed trusts’ ability to protect assets from creditors, provided: • the trust is established for legitimate purposes (eg, asset protection or succession planning) without intent to defraud creditors; and • the settlor was solvent at the time the assets were transferred into the trust.
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