Is money or property from overseas income from a foreign trust?

Received some money or property from overseas that you weren’t expecting? Excellent (and congratulations!).  

While you calculate what that means for you, please consider getting tax advice. If you have already sought advice on the tax treatment on your ‘windfall’, even better. If not, it’s worth reviewing to ensure everything is in order, as it may not be a windfall for NZ tax purposes, i.e. it could be taxable. 

If you're a NZ tax resident (and not a transitional resident), you're generally taxed on income from both NZ and overseas.  If it’s not been four years since you emigrated to NZ or returned to NZ after being overseas for at least 10 years (i.e. not been a NZ tax resident for at least 10 years), you’re likely to be a transitional resident.   

For New Zealand tax residents, assessable income includes money or property received from offshore as either beneficiary income or a taxable distribution, provided the source is a “trust” as interpreted under New Zealand tax law. 

Understanding whether a foreign trust exists and how the income is taxed is key to getting the tax treatment right.  

What do you need to consider? 

The first step to consider is if the amounts have come from a trust. What is a trust for New Zealand tax purposes in the first place?  

The Income Tax Act 2007 (‘Tax Act’) does not define what a trust is for determining whether an amount or property received is trustee income or beneficiary income.  Trustee income is taxed at the trustee income tax rate which is currently 33% if the trust’s income is $10,000 or less and 39% if the trust’s income is more than $10,000 (there are certain situations where the 39% rate does not apply).  Beneficiary income is taxed at the beneficiary’s marginal income tax rate.  

In New Zealand, it is very common that the creation of a trust is documented by way of a trust deed. Where a trust deed exists, it is clear that distributions made to beneficiaries are income that is taxable. Where a trust deed does not exist, the IRD will consider (if they suspect there is some risk of there being untaxed income) whether there was a trust by taking guidance from the definition of a trust in The Trusts Act 2019 (s.13) and the common law concept of a trust. Therefore, the absence of a trust deed is not a bulletproof defence that there was no trust and therefore the recipient of money or property has received a gift (not taxable) rather than a distribution from a trust (likely to be fully or partially taxable).  We shouldn’t also expect documentation of the creation of a trust to be common practice in overseas jurisdictions as it is in New Zealand. 

The second step is to consider if the trust is a foreign trust.  

What features would render the trust a foreign one?  

Thank goodness the Tax Act spells out what a foreign trust is.  Once you have established that there is/was a trust (in the absence of a document that makes that obvious), you can then rely on the Tax Act to work out whether or not it is a foreign trust.  

A trust is a foreign one if it does not have a settlor who was a NZ tax resident at any time between the later of 17 December 1987 and the date on the first settlement and a moment in time. This moment in time would very likely be the date of the money or property was transferred to you.  In short, the earliest start date of the period for testing is 17 December 1987. If it is a foreign trust, it is necessary to apply the trust rules and consider whether the amount is beneficiary income or a taxable distribution for determining how it will be taxed. 

Trust rules? What are they? The trust rules are a collection of provisions in the Tax Act that govern deductibility of expenses incurred and the taxation of income derived by all types of trusts, including foreign trusts.  This collection of provisions are outlined in Definitions section (i.e. section YA 1) of the Tax Act. 

Recently, Inland Revenue issued interpretation statement IS 25/18: “Income tax – Whether money or property received by New Zealand tax residents from overseas is income from a foreign trust” (“IS 25/18”), which replaces interpretation statement IS 19/04 “Income tax – distributions from foreign trusts”. 

If you are wondering what an interpretation statement is. An interpretation statement sets out Inland Revenue’s “view of the taxation laws in relation to a particular set of circumstances in cases when a binding public ruling cannot be issued or is considered to be inappropriate” (the ‘About our publications’ section of Inland Revenue’s website). 

IS 25/18 considers the income tax treatment of amounts of money or property that NZ tax residents receive from a person overseas, including through inheritance.  

The statement explains how Inland Revenue may go about their analysis when considering whether someone is acting as a trustee of a trust when they send money or property to a NZ tax resident (who is not a transitional resident) and whether the money or property is beneficiary income or a taxable distribution from a foreign trust in the hands of the recipient. 

What is the difference between beneficiary income and a taxable distribution in the context of foreign trusts?  

Beneficiary income is current-year income that vests in or is paid to a beneficiary within set timeframes whereas a taxable distribution is a distribution that is not a distribution of:  

• beneficiary income; or 

• a part of the corpus of the trust; or  

• a profit from the realisation of a capital asset or another capital gain; or  

• a foreign superannuation withdrawal; or  

• a pension; or 

• a payment or a transaction that represents a distribution of either the corpus of the trust or a capital gain. 

A distribution from a foreign trust to a New Zealand tax resident may still be subject to income tax, even if it appears to be a capital or corpus distribution under trust law, or if similar amounts are distribution tax-free to non-resident beneficiaries. The fact that the distribution is not taxable to others does not exempt the New Zealand resident from the tax liability. 

Rules that determine the order in which components of the distribution is assessed first for taxability to prevent manipulation to avoid income tax being paid in NZ.  These are called ordering rules.  These rules override the trust deed and trustee discretion, except in the case of non-discretionary testamentary trusts. 

The ordering rules rank taxable elements (components) of a distribution ahead of elements that are not taxable, in that taxable amounts are treated as received before non-taxable amounts.  Once an element is determined to have been present in the distribution, the amount relating to that element is no longer available to be considered under the subsequent ordering rule.   

There are six levels of ordering rules (in case you’re curious): 

1. What element of the distribution is beneficiary income in the previous income year? 

2. What element of the distribution is trustee income in the income year? 

3. What element of the distribution is trustee income in an earlier income year? 

4. What element of the distribution is capital gain derived in the income year?  

5. What element of the distribution is capital gain in an earlier income year? 

6. What element of the distribution is the corpus of the trust? 

Note that trustee income is calculated using NZ tax law, not the law of the foreign jurisdiction.  Overseas financial statements may need adjustment to reflect NZ-defined income, capital gains, and corpus. 

If distribution elements cannot be accurately determined, the entire amount is treated as taxable.  As a beneficiary, you bear the burden of proof in establishing the nature of the distribution.  Taxable distributions and beneficiary income are taxed at your marginal tax rate.  

So, it is prudent to speak with a tax advisor on whether or not the property or money you have received from overseas is taxable or not, rather than wait for the taxman to come knocking on your door for undeclared income.  This includes property or money received from a deceased estate, as the manner in which the estate is administered could give rise to a foreign trust. If you’re keen to delve more into the details, click here to go to IS 25/18. It’s only 51 pages long.  But if you prefer not to read that or do not have the time to do so, TaxTrail would be happy to have an initial no-obligations chat with you. 

Source: IS 25/18: Income tax – Whether money or property received by New Zealand tax residents from overseas is income from a foreign trust, Tax Technical Inland Revenue website, 7 August 2025, accessed 18 August 2025.