Prior to the Amendments

NZ has taxed trusts based on the settlor’s tax residence since 1987. A trust with a NZ resident settlor is taxed on its worldwide income even if trustees are non-residents. In contrast, a trust that has never had a NZ resident settlor is only taxed on its NZ sourced income even if trustees are residents. This is done through the foreign sourced income exception in S HC 26 of the ITA.

In 2017, the disclosure requirements for foreign trusts were strengthened significantly in response to concerns that the trust were being used to avoid foreign income tax. In order for the foreign sourced income exception to be applicable, the trust must now be in compliance with rules in S 59B to 59D of the TAA. However, this requirement is only in place for foreign trusts and so some trusts can use the foreign-sourced income exemption without technically being a foreign trust. This misalignment is contrary to the original policy intent.

The Proposed Amendments

The amendments will correct the misalignment through:

• Providing a new definition of “foreign exemption trust” to clarify which trusts must comply with the obligations
• Not requiring a trustee of a foreign exemption trust to apply the domestic trust disclosure rules. This will reduce unnecessary compliance and administrative costs.

A NZ resident trustee will be required to register if a trust falls within the proposed foreign exemption trust definition. The proposed amendment would also require the trustee to provide an annual return that includes the period in which the exemption is first claimed.

The annual return would have to meet the requirements of section 59D of the TAA.  

HC 33 Exception

If an election is made under HC 33 to satisfy the income tax liability of the trustee, it is proposed that the trust would top being a foreign exemption trust from the date the election is applied.

Effective Date

The proposed amendments will be in effect from 31 March 2023.

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