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IR6 Question 8 Types of estates and trusts

The type of trust determines the way certain distributions are taxed in the hands of beneficiaries. There are three types of estates or trusts for income tax purposes:

  • complying

  • foreign

  • non-complying.

Complying trust

In general a complying trust is one that has been taxed in New Zealand on all its trustee income since the date it began and the trustee has met all its tax obligations. Complying trusts include:

  • trusts settled by New Zealand residents with New Zealand trustees and New Zealand beneficiaries

  • estates of people who were New Zealand residents when they died

  • foreign trusts that have elected to become complying trusts.

The trust can still be a complying trust if the trustee was not liable for New Zealand income tax because:

  • the trust earned no income, or

  • the income was exempt, or

  • the trust was in a loss situation.

Foreign trust

A foreign trust is one where no settlor of the trust has been resident in New Zealand since:

  • 17 December 1987, or the date the trust was first settled, whichever is later, and on the date of distribution.

Non-complying trust

A trust that isn’t a complying trust or a foreign trust is a non-complying trust. Non-complying trusts include:

  • trusts with a New Zealand-resident settlor, but non-resident trustees, that haven’t been liable for or haven’t paid New Zealand income tax on all trustee income since first being settled

  • foreign trusts where the settlor has become a New Zealand resident and an election hasn’t been made to be a complying trust

  • all the beneficiaries are non-residents and all the income is passive income such as interest, dividends, and royalties.

Election to change category of trust for tax purposes

New residents or former residents who have settled a trust before coming to New Zealand may elect to pay New Zealand tax on future trustee income. Making this election will mean the trust becomes a complying trust for income derived on or after the date on which the election is made. An election can be made by a settlor, trustee or beneficiary using an Election to pay income tax on trustee income (IR463) form.

If an election isn’t made the trust will become a non-complying trust. Elections must be made within 12 months of a new resident ceasing to be a transitional resident, and within 12 months of the arrival for a former resident.

Unit trust

A unit trust is treated as a company for tax purposes. If you’re preparing a tax return for a unit trust, please complete a Companies income tax return (IR 4).

Group investment fund

If the income is:

  • solely from Category B income, an IR6 must be completed

  • solely from Category A income, an IR4 must be completed

  • a combination of both Category A and Category B income, an IR4 and IR44E must be completed. Please read the notes on the IR44E for further information.

Superannuation schemes

A superannuation scheme that isn’t registered with the Financial Markets Authority and doesn’t allow investors to contribute will be treated as a trust for tax purposes and must file an IR6 return.

Income and credits section

Income received by a trust retains its character as it passes through the trust. For this reason Inland Revenue ask that you return different types of income in certain boxes.

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