Tax Updates: 12 May 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Is an amount derived from a foreign trust?

You may have had clients approach you in the past with questions surrounding an amount they are going to receive from offshore. Perhaps on the death of a family member or from a family trust that an offshore family member has established. What will likely be the primary concern for your client is whether the amount will be subject to tax when received.

What is important, in this regard, is determining whether the amount the client receives will be deemed to come from a foreign trust. This is due to the fact that under NZ tax rules, distributions from foreign trusts to New Zealand (NZ) resident beneficiaries may be subject to taxation either as beneficiary income or as a taxable distribution.

To assist you with determining the likely tax status of your client’s receipt, Inland Revenue (IR) has recently issued a draft interpretation statement (IS) titled “Income tax – Whether money or property received by New Zealand tax residents from overseas is income from a foreign trust.”

The draft interpretation statement has the reference PUB00494, and it is, in essence, simply an updated item to the earlier edition – IS 19/04 Distributions from foreign trusts.

As the statement outlines on the first page, its focus is to consider the income tax treatment of amounts of money or property that New Zealand tax residents receive from a person overseas, including through inheritance. It addresses how to determine whether the person who transfers the money or property is a trustee of a trust and when the resident taxpayer has derived beneficiary income or a taxable distribution from a foreign trust.

Determining the correct characterisation is important because a simple inheritance would usually be seen to be a gift from the offshore person to your client (with no associated taxation implications). Whereas a distribution from a foreign trust will only have no taxation implications for your client if components of the distribution are either certain capital gains or corpus of the trust.

Now you may think, “Ok, no biggie, I’ll simply instruct the foreign trustees to only distribute capital gains and corpus to my client.” Great idea, except we have what are referred to as the ordering rules, which, in essence, ignore the character given by the trustees to the components of any distribution. And instead, apply an order (naturally), where the distribution is firstly considered to be current year income of the trustees (if not allocated as beneficiary income), then accumulated income (past years) of the trustees, then capital gains and then corpus. So you only move on to the next category in the list when all amounts in the previous category have been exhausted. And if your client is unable to obtain sufficient records from the offshore trustees to establish the relevant components, then they may find all their distribution being subject to tax.

The draft IS commences with a fairly lengthy discussion on what a trust is, which is a consideration to be made under NZ law, regardless of how the arrangement is described in the foreign jurisdiction. So if you are approached with this type of question from your client, the first thing to do is fully understand the nature of the beast that you are dealing with. Would the arrangement be considered a trust under NZ law? If not, then the amount to be received by your client will not be considered a distribution from a foreign trust. However, there could be other taxation implications for your client. For example, between the date of death and the date of transfer of the asset to your client, has a bare trust arrangement been in play, with the consequence that any income derived by the asset in the intervening period should have been reported in your client’s income tax return?

There is also a fairly lengthy discussion surrounding the administration of estates and the differences between common law countries like NZ, Australia and the United Kingdom (UK) and civil law countries like Switzerland, France and Germany. Often with the latter, a foreign trust will never arise (because assets are deemed to become the successors at the time of death), however then your client will be deemed to have owned the asset from the date of death, which may bring with it an obligation to report the income from the offshore assets.

The document is 51 pages long and concludes with a number of examples. If you would like to make a comment, you need to do so no before the 19^th of June.

Some final pointers:

• A foreign trust can also be a complying trust, which, as a dual status trust, is then simply considered to be a complying trust;

• A foreign trust is one where there has never been an NZ tax resident settlor;

• When determining the components of any distribution from a foreign trust, you need to determine what the trustees have derived (income/capital) under NZ tax rules. Australian rental income would need to be calculated under NZ rental income rules, for example; and,

Administrators and executors may be referred to as trustees (and certainly estates are subject to taxation under the trust rules), but they are trustees of the deceased and not of the potential beneficiaries of the estate. So, a trust is unlikely to arise until the time of “assent”, when a previous administrator/executor may then become a trustee.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.