There has been a lot of media coverage on this matter of late. Foreign Trusts have been labelled everything from an instrument of tax avoidance to a tool used for money laundering. Therefore we think it’s important to consider how a Foreign Trust actually operates for New Zealand “tax” purposes.

New Zealand Trusts are taxed based on the residency of the settlor. A Foreign Trust (for tax purposes) is a Trust where there has generally been no resident settlor since the start of the Trust’s “life”. 

Note that the term settlor is very broad and a person can make an inadvertent settlement and be deemed to be a settlor of a Trust (i.e. an interest free loan to the Trust). 

A beneficiary of a Foreign Trust that is a New Zealand tax resident will generally have to pay income tax on distributions from the Foreign Trust. 

For non-resident beneficiaries of a Foreign Trust income tax will only be payable in relation to New Zealand-sourced income. 

If a distribution from a Foreign Trust is taxable in New Zealand depends on the nature of the distribution. 

The bottom line is that the rules in relation to taxing of Trusts can be said to be on the more complex side but are similar to how we tax individuals. 

That is, we tax New Zealand residents on their worldwide income and only tax non-residents on their New Zealand-sourced income. 

Disclosure requirements for Foreign Trusts were reviewed in 2004 and resulting from this, from 1 October 2006, New Zealand resident trustees of a Foreign Trust are now required to keep records disclosing the history of the Trust’s administration and also disclose certain information to the IRD. 

However, given that New Zealand has a tax system which usually imposes tax based on the residency of a person, unless the current rules are changed specifically in relation to Foreign Trusts, things are unlikely to change.