Trusts & Residency 

 
Grange Associates Ltd - 26 July 2013

As New Zealanders continue to emigrate to Australia in increasing numbers, it is important that those who have established trusts here consider the tax consequences of such a move.

There are three main types of trust for New Zealand tax purposes:

• Complying trust
• Foreign trust
• Non-complying trust

These classifications are determined based on the tax residency of a trust’s settlor(s) at the time of a distribution.  “Settlor” is defined very broadly for tax purposes, it includes anyone who directly or indirectly transfers value to, for the benefit of, or on the terms of the trust.

A trust will be a complying trust in relation to a distribution if from the point a settlement was first made through to the tax year of the distribution all of its trustee income has been taxed at the trustee tax rate (33%) and all income tax obligations have been satisfied.

A trust will be a foreign trust if no settlor has been resident in New Zealand at any time in the period from the later of 17 December 1987 and the date on which the trust was settled and the date of a distribution.  Some distributions from foreign trusts to New Zealand resident beneficiaries will be taxable in the hands of the beneficiary (such as non-arm's length capital gains and trustee funds accumulated after 1 April 1988) that would otherwise be non-taxable for a complying trust.

A trust will be considered a non-complying trust for a distribution if it is neither a complying, nor a foreign trust, e.g the settlor is no longer a New Zealand resident.  Distributions of trustee income and capital gains from non-complying trusts are taxable at a rate of 45% to New Zealand resident beneficiaries.

An issue can arise for trusts that hold overseas investments (such as shares) which derive non-resident passive income when the trust settlor ceases to be a New Zealand resident.  If no settlor of the trust is resident in New Zealand at any time during the income year, any foreign sourced income is deemed not to be liable for income tax.  Thus not all trustee income would have been taxed in New Zealand, technically making the trust a non-complying trust if a distribution is to be made.

However, this situation can be avoided if the trust distributes the non-resident passive income to beneficiaries in the year it is derived and continues to meet all other tax obligations, it should be able to maintain complying trust status, as the non-resident passive income will now be taxable in the hands of the beneficiaries.

Another way to retain complying trust status would be to ensure there is more than one settlor of a trust and that at least one of the settlors remains a New Zealand resident at all times.

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