How New Zealand taxes trusts

New Zealand classifies a trust for tax purposes primarily by the tax residence of its settlor, not by where the trustees are based. Every trust falls into one of three classes: a complying trust, a foreign trust or a non-complying trust. Each year's income is either allocated to a beneficiary within a set window and generally taxed at the beneficiary's personal rate, or retained by the trustees and generally taxed at the 39% trustee rate. Whether foreign-sourced income falls within the New Zealand tax net is tested at two levels: the settlor's residence for income retained in the trust, and the beneficiary's residence for income distributed.

The six sections below explain each of those elements in turn. The article deals with the underlying rules only, not with particular structures.

1. Why New Zealand looks at the settlor

Under the Income Tax Act 2007, the tax treatment of a trust turns on the tax residence of its settlor during the relevant period. Many other countries classify a trust by the residence of the trust itself or of its trustees. New Zealand does not. Its approach is usually described as a settlor-based regime.

A trust is a legal structure, and the person who put value into it is the settlor. New Zealand taxes the trust by reference to that person. The residence of the trustees and of the beneficiaries still matters, though, and is discussed later.

The Act defines settlor more widely than trust law does. A person who transfers value to a trust is a settlor for tax purposes. This may include a person who lends to the trust interest free or at below-market interest, who guarantees the trust's debts without charging a market-rate fee, or who provides property, or services that are more than incidental to running the trust, for less than market value (s HC 27).

Every classification, income rule and distribution rule that follows rests on the same foundation: the tax residence of the settlor.

2. The three tax classifications: complying, foreign and non-complying

New Zealand's income tax rules divide trusts into three classes (ss HC 10 to HC 12).

Complying trust

A trust is a complying trust if, for every year since it was first settled, all of its trustee income has been within the New Zealand tax net and the trustees have met their tax obligations each year (s HC 10). The typical example is a family trust with a New Zealand resident settlor, New Zealand trustees, and income returned and taxed in New Zealand.

Strictly, the test asks whether the income has been taxed in New Zealand, not where the settlor lives. A trust whose settlors are all non-resident but whose income is entirely New Zealand-sourced, and taxed under New Zealand rules, can satisfy both the complying trust test and the foreign trust definition at the same time. Where that happens, it is taxed as a complying trust.

The trustee income of a complying trust is taxed at the 39% trustee rate from the 2024/25 income year, matching the top personal rate. A de minimis exception applies: in a year where trustee income after deductible expenses is NZD 10,000 or less, the rate remains 33%. This is a threshold, not a band: once trustee income exceeds NZD 10,000, the whole amount is taxed at 39%.

Foreign trust

A trust is a foreign trust if no settlor has been a New Zealand tax resident at any time from the later of 17 December 1987 and the date the trust was first settled, up to the time the question is asked (s HC 11).

The distinguishing feature of a foreign trust is the treatment of its foreign-sourced income. While no settlor is a New Zealand tax resident, foreign-sourced income derived by the trustees is generally exempt from New Zealand tax, subject to conditions (ss CW 54, HC 25 and HC 26). Since the 2017 reforms, a foreign trust with a New Zealand resident trustee must register with Inland Revenue and file an annual return, and registration and disclosure are conditions of the exemption. A trust that is not registered, or that fails to meet its disclosure obligations, can lose the exemption on its foreign-sourced income for that year (Tax Administration Act 1994 ss 59B to 59D, s HC 26).

Non-complying trust

A trust that satisfies neither the complying trust test nor the foreign trust definition is a non-complying trust (s HC 12). Two causes are common. One is a former foreign trust whose settlor became a New Zealand tax resident without an election being made in time (see section 6). The other is a trust that should have paid New Zealand tax but whose trustees did not meet their obligations.

The key consequence is the rate on distribution: a taxable distribution from a non-complying trust is taxed in the beneficiary's hands at 45% (s HC 34).

The classification matters because it determines both how the trust itself is taxed each year and the rate a beneficiary faces when money is later distributed. The table summarises the differences.

3. Beneficiary income and trustee income

Income derived by a trust in a year is taxed in one of two ways: as beneficiary income or as trustee income.

Beneficiary income

An amount of income is beneficiary income if it vests absolutely in a beneficiary during the year, or is paid or applied to a beneficiary during the year or within a set window after year end (s HC 6). The window is six months after balance date, which is 30 September for a trust with a 31 March balance date. Where both the trust's actual filing date and its return due date fall later than that, the window runs to the earlier of the two.

The beneficiary pays the tax at their own marginal rate, which ranges from 10.5% to 39%. There is one exception. In most family trusts, beneficiary income allocated to a New Zealand resident minor under 16 is taxed at the 39% trustee rate where the minor's beneficiary income from that trust exceeds NZD 1,000 for the year. The whole amount is caught, not only the excess (the minor beneficiary rule, s HC 35).

How beneficiary income is finally taxed depends not only on the trust but also on the beneficiary's own tax residence. Section 4 deals with that second level.

Trustee income

Income that is not distributed within the window, and so remains in the trust, is trustee income (s HC 7). The trustees pay tax on it, in their capacity as trustees, at 39% from the 2024/25 income year, subject to the de minimis exception described above.

4. Foreign-sourced income

Whether foreign-sourced income is taxed in New Zealand is tested at two levels, and each level looks at a different person.

At the trust level, that is, for trustee income, the test is the settlor's tax residence. If any settlor is a New Zealand tax resident, the trust's worldwide income is in principle returned and taxed in New Zealand. A credit is usually available for foreign tax already paid, under the foreign tax credit rules. If no settlor is a New Zealand tax resident, the foreign-sourced trustee income of a foreign trust sits outside the New Zealand tax net.

Transitional residents are a special case at this level. During the transitional period (broadly four years, often a little longer), a settlor who is a transitional resident is treated as non-resident for this purpose. The trust's foreign-sourced trustee income stays outside the net for the time being, provided any New Zealand resident trustee has registered the trust and met the filing obligations described in section 2.

At the beneficiary level, for beneficiary income, the test is the beneficiary's tax residence. New Zealand residents are taxed on their worldwide income, so a New Zealand resident beneficiary pays New Zealand tax on beneficiary income from any source. The exception is a transitional resident beneficiary, who is not taxed on the foreign-sourced part during the transitional period. A non-resident beneficiary pays New Zealand tax only on the New Zealand-sourced part of their beneficiary income; the foreign-sourced part is not taxed in New Zealand. The trustees usually return and pay the New Zealand tax of a non-resident beneficiary as agent.

This matters because families move. If a settlor or a beneficiary becomes, or stops being, a New Zealand tax resident at some point, the tax treatment of the same foreign income can change, and the family may not realise that it has.

5. Distributions to beneficiaries: current-year and accumulated

Sooner or later a trust's funds are distributed to beneficiaries, and how a distribution is taxed depends on two things: the nature of what is distributed, and which class the trust is in.

Distributed in the year

A distribution of the current year's income within the window is the beneficiary income described in section 3. The beneficiary is taxed on it at their personal rate, and the trust pays no further tax on it.

Accumulated, then distributed later

Where the trust retains a year's income, pays trustee tax on it and distributes the accumulated amount in a later year, the class of trust decides the outcome.

For a complying trust the position is straightforward: a distribution of taxed accumulated income is not taxed again in the beneficiary's hands (s CW 53).

For a foreign trust distributing to a New Zealand resident beneficiary, the position is more involved. A foreign trust's fund may hold several kinds of money at once: income already taxed in New Zealand, accumulated foreign-sourced income that was outside the New Zealand tax net, capital gains, and corpus (the capital the settlor contributed). Each layer is treated differently. Accumulated income that is distributed is a taxable distribution, taxed at the beneficiary's personal rate. Capital gains (apart from certain gains from non-arm's-length transactions with associated persons) and corpus are not taxed when distributed (s HC 15).

The trustees generally cannot choose which layer a distribution comes from. The Act's ordering rule (s HC 16) generally fixes the sequence. A distribution is treated as made first from any income of the previous year already allocated to that beneficiary as beneficiary income, then from current-year income, then from accumulated income of earlier years, then from current-year capital gains, then from earlier years' capital gains, and only then from corpus.

For a non-complying trust the layers and the ordering rule are the same, but the definition of taxable distribution is wider. Both accumulated income and capital gains are taxed at 45% when distributed; only corpus is not. Income the trust accumulated while it was still a foreign trust generally keeps foreign trust treatment.

6. How a trust's class shifts when residence changes

Settlors migrate and beneficiaries move, and a trust's class can shift with them. The common ways this happens are set out below.

Where a settlor becomes a New Zealand tax resident, a foreign trust loses its foreign status at that moment. A trustee, settlor or beneficiary can make an election within 12 months of the settlor becoming resident, and before any distribution is made (s HC 30, form IR463). The election brings the trust's trustee income into the New Zealand tax net from that point, and the trust is treated as a complying trust for income derived after the election. Where the settlor is a transitional resident, the 12 months run from the end of the transitional period. Accumulated income derived before the election is generally still treated as coming from a foreign trust when it is distributed later.

If the period passes without an election, the trust generally becomes a non-complying trust for income derived from then on, and accumulated income and capital gains derived after that date are taxed at 45% when distributed. However, under certain conditions, the Act allows a late election to remedy the position (s HC 33).

Another common scenario is a settlor leaving New Zealand. Where all the settlors of a complying trust have moved offshore, the trust's foreign-sourced income may no longer fall automatically within the New Zealand tax net. It is important for the trustees to assess the trust's status and decide whether to continue returning the trust as a complying trust (s HC 33).

Frequently asked questions

What is the tax rate for a New Zealand trust?

Trustee income retained in the trust is generally taxed at 39% from the 2024/25 income year, or at 33% in a year where trustee income after expenses is NZD 10,000 or less. Income allocated to a beneficiary within the window is generally taxed at the beneficiary's personal rate.

Does a trust set up in New Zealand always pay New Zealand tax?

Not always. A trust with no New Zealand resident settlor (a foreign trust) is generally not taxed in New Zealand on its foreign-sourced trustee income. Where a trustee is New Zealand resident, however, the trust must be registered with Inland Revenue and file annually, and New Zealand-sourced income is taxed whoever the settlor is.

What happens to an offshore family trust when the settlor migrates to New Zealand?

The trust loses its foreign status on the day the settlor becomes tax resident. If an election is made within 12 months (running from the end of the transitional period for a transitional resident), the trust becomes a complying trust. If no election is made, the trust generally becomes a non-complying trust, and accumulated income and capital gains it derives from then on are taxed at 45% when distributed, unless a late election restores complying status.

Is money taken out of a trust taxed?

That depends on three things: the nature of the money, the class of trust and the beneficiary's tax residence. For a New Zealand resident adult beneficiary, in general terms: current-year income distributed is taxed at personal rates; accumulated income from a complying trust is tax free; accumulated income from a foreign trust is taxed at personal rates, while its capital gains generally are not.

Who counts as a settlor?

Anyone who transfers assets to the trust, and anyone who transfers value to it for less than market value. That includes interest-free or low-interest loans, guarantees given without a market-rate fee, property provided below market value, and services provided below market value that are more than incidental to running the trust. The tax definition is wider than the settlor named in the trust deed.

Legislation and guidance

• Income Tax Act 2007
• Tax Administration Act 1994
• Inland Revenue, Interpretation Statement IS 24/01 "Taxation of trusts"
• Inland Revenue Tax Policy, special report "39% trustee tax rate"
• Inland Revenue Tax Policy, special report "Foreign trust disclosure rules"

This article is general information. It reflects New Zealand law and Inland Revenue guidance as at July 2026, which may change. It is not tax, legal, immigration or financial advice for any person or entity and does not create a client relationship. How a trust is classified and how its distributions are taxed depends on each family's facts.