Foreign Trusts & Inheritances: What You Need to Know
Questions often arise whether a sum of money or property received from overseas is taxable in New Zealand? In many cases, these payments arise from inheritances or family trusts based offshore. While the assumption is often that such transfers are tax-free, the reality can be quite different—especially when the distribution is deemed at law to come from a foreign trust.
IRD has released a draft interpretation statement (PUB00494), titled “Income tax – Whether money or property received by New Zealand tax residents from overseas is income from a foreign trust.” It provides updated guidance to help determine if overseas-sourced receipts are taxable distributions, beneficiary income or non-taxable gifts/inheritances.
What is the issue?
The first crucial step is assessing whether the offshore arrangement constitutes a foreign trust under NZ tax law. This assessment is made regardless of how the arrangement is classified overseas. For example, an estate or civil law succession may not involve a trust structure in the foreign country, but could still be treated differently under New Zealand’s tax framework.
If the arrangement does qualify as a trust, the next question is whether it’s a foreign trust—meaning none of the settlors have ever been New Zealand tax residents. If so, distributions from the trust to NZ beneficiaries are potentially taxable, unless they qualify as exempt capital gains or corpus, subject to the ordering rules in subpart HC which override trustee characterisation and determine the components of the distribution for NZ tax purposes. Distributions regardless of how classified in the foreign jurisdiction are considered to be made in following order:
If sufficient records are not available to support the makeup of the distribution, the entire amount may be taxable.
Legal Classification and Cross jurisdictional complexity
A key part of the draft statement is determining whether the arrangement constitutes a trust under New Zealand law. The statement also looks at scenarios where the foreign source is an estate, particularly under civil law systems (e.g., France, Germany, Switzerland), where assets typically vest in heirs immediately on death. In such cases, while no trust arises, NZ tax obligations may still exist—for example, if the asset earns income before being transferred, the recipient may be deemed to have held it from the date of death and may have a reporting obligation for interim income.
By contrast, in common law jurisdictions (e.g., Australia, UK), the estate is often administered via a formal trust-like structure. However, the executors or administrators are typically seen as trustees for the deceased, not for the beneficiaries, until assent occurs. This distinction is important for determining when a trust relationship (for NZ tax purposes) begins and how the distributions are treated for income tax purposes.
May 2025
