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Income Tax Act 2007

Taxation of certain entities - Trusts

HC 30: Treatment of foreign trusts when settlor becomes resident

You could also call this:

“Changes to foreign trust tax rules when the trust creator becomes a New Zealand resident”

This section talks about what happens to foreign trusts when the person who set them up (the settlor) becomes a resident of New Zealand. Here’s what you need to know:

When a settlor becomes a New Zealand resident or stops being a transitional resident, they, the trustee, or a beneficiary can choose to pay the trust’s income tax. They have to make this choice by a certain date, which is one year after the settlor became a resident.

If they choose to pay the tax, the trust is treated in different ways depending on where the money came from and when:

It’s treated as a foreign trust for money that doesn’t create a tax bill after the settlor became a resident.
It’s treated as a complying trust for money that does create a tax bill after the settlor became a resident, as long as the tax is paid before the money is given out.
It’s treated as a non-complying trust for any other money.

If they don’t choose to pay the tax, the trust is still treated differently based on where the money came from:

It’s a foreign trust for money that doesn’t create a tax bill after the settlor became a resident.
It’s a complying trust for money that creates a tax bill that’s paid before it’s given out.
It’s a non-complying trust for money that creates a tax bill that isn’t paid before it’s given out.

When figuring out how much money the trust made before the choice date or the one-year mark, you can either use the actual amount or use a formula to calculate it based on the whole year’s income.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517338.

Topics:

Money and consumer rights > Taxes

HC 29: Settlors’ liability to income tax, or

“How you might pay income tax on trust income if you set up a trust”

HC 31: When existing trusts come into tax base, or

“Trusts that suddenly become taxable in New Zealand can choose how to value their assets”

Part H Taxation of certain entities
Trusts

HC 30Treatment of foreign trusts when settlor becomes resident

This section applies for the purposes of section HC 15 and the definition of taxable distribution when—
a settlor of a trust is a natural person who on a day (the transition date)—
1. becomes resident in New Zealand and is not a transitional resident:
2. stops being a transitional resident and continues to be a New Zealand resident; and
the trust would be a foreign trust in relation to a distribution if a distribution were made immediately before the settlor became resident.

A settlor, trustee, or beneficiary of the trust may choose to satisfy the income tax liability of the trustee under section HC 33. They must make the election by the election expiry date.
If an election under subsection (2) is made, the trust is treated as follows:
as a foreign trust to the extent to which the distribution consists of an amount derived by the trustee before the date of the election and which does not give rise after the transition date to an income tax liability that is paid before the distribution is made:
as a complying trust to the extent to which the distribution consists of an amount that is derived by the trustee—
1. before the date of the election and gives rise on or after the transition date to an income tax liability that is paid before the distribution is made; or
2. on or after the date of the election, if the requirements of section HC 10(1)(a) are met for the trustee income derived on or after the date of the election:
as a non-complying trust to the extent to which the distribution consists of an amount that would not be included in a distribution described in paragraphs (a) and (b).

If an election under subsection (2) is not made, the trust is treated as follows:
as a foreign trust to the extent to which the distribution consists of an amount that is derived by the trustee before the election expiry date and does not give rise on or after the transition date to an income tax liability:
as a complying trust to the extent to which the distribution consists of an amount derived by the trustee that gives rise on or after the transition date to an income tax liability meeting the requirements of subsection (4B) or section HC 10(1)(ab):
as a non-complying trust to the extent to which the distribution consists of an amount derived by the trustee that gives rise on or after the transition date to an income tax liability that is not satisfied before the distribution is made.

An income tax liability meets the requirements of this subsection if—
the income tax liability is satisfied before the distribution is made, other than for the trust as a complying trust under an election under section HC 33; and
the income tax liability gives rise to a tax shortfall for the trustee for an income year ending before the distribution is made; and
where a shortfall penalty arises for the tax shortfall, the shortfall penalty is satisfied before the distribution is made.

In this section, the election expiry date is the day that is the first anniversary of the transition date.
For the purposes of subsections (3) and (4), the amount derived in the part of the income year before the person makes the election, or before the election expiry date, as applicable, is at the option of the person either—
the amount actually derived in the part year; or
an amount calculated using the formula—

amount derived in income year of election× days before election date or election expiry date ÷ 365.

Where:

Compare

2004 No 35 s HH 2

Notes

Section HC 30(3)(a): amended, on 18 March 2019, by section 212(1) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
Section HC 30(3)(b): replaced, on 18 March 2019, by section 212(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
Section HC 30(3)(c): replaced, on 18 March 2019, by section 212(2) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
Section HC 30(4)(a): replaced, on 18 March 2019, by section 212(3) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
Section HC 30(4)(ab): inserted (with effect on 23 March 2020), on 30 March 2021, by section 89(1) (and see section 89(4) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
Section HC 30(4)(ab): amended (with effect on 23 March 2020), on 30 March 2021, by section 89(2) (and see section 89(5) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
Section HC 30(4)(b): replaced (with effect on 23 March 2020), on 30 March 2021, by section 89(1) (and see section 89(4) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
Section HC 30(4B) heading: inserted (with effect on 23 March 2020), on 30 March 2021, by section 89(3) (and see section 89(4) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
Section HC 30(4B): inserted (with effect on 23 March 2020), on 30 March 2021, by section 89(3) (and see section 89(4) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).