Overseas shares — the tax trap and how to avoid it
TRUSTS & TAX · PERSONAL INVESTING
Overseas shares in your trust — the 39% tax trap and how to avoid it
If your family trust owns overseas shares or funds, Inland Revenue taxes it each year on income it may never have received. Since 1 April 2024 that “phantom” income is taxed at 39% unless it is properly allocated to beneficiaries — and Inland Revenue says a line in the tax return is not enough. Here is what the rules require, what our trust deeds already do, the one-page minute your trustees need to sign every year, and why we recommend a $360 update to put the matter beyond argument. We also cover what the same rules mean if you hold overseas shares personally.
Key points
• Overseas shares are usually taxed on a deemed 5% return, whether or not any dividend was paid.
• Trustee income is taxed at 39%; allocated beneficiary income is taxed at each beneficiary’s own rate.
• Inland Revenue (IS 12/02): deemed income becomes beneficiary income only if real money is allocated by a resolution that says so.
• Our deeds already allow this; a $360 Second Schedule update adds express words and a draft annual minute.
• Own overseas shares personally? The $50,000 threshold, proposed to rise to $100,000, decides whether the rules bite.
The rules in play
Three sets of rules meet here. The foreign investment fund (FIF) rules in the Income Tax Act 2007 tax most overseas shares and funds on a deemed return — under the usual “fair dividend rate” method, 5% of the portfolio’s value at the start of the year — regardless of what was actually received (IR461, Inland Revenue’s FIF guide). The trust rules in section HC 6 of the same Act split a trust’s income into “beneficiary income”, taxed at each beneficiary’s own rate, and “trustee income”, taxed at 39% since 1 April 2024 (33% only where the trust’s net trustee income is $10,000 or less). And Inland Revenue’s Interpretation Statement IS 12/02 answers the question every trustee with overseas shares should ask: can income that exists only on paper be allocated to beneficiaries at all?
Topic 1 — Your trust’s overseas shares: the income that is not there
The Harper Family Trust — a worked example
Say the Harper Family Trust holds $600,000 of US index funds. In the year to 31 March 2027, the funds pay $9,000 in dividends and the trust earns $3,000 in bank interest. For trust purposes, its income is $12,000. For tax purposes, the FIF rules deem income of 5% of $600,000 — $30,000 — plus the $3,000 interest: $33,000. The $21,000 gap is income that the trust never received.
If the trustees do nothing, that $21,000 is trustee income and the tax bill is $21,000 × 39% = $8,190. If the trustees can allocate it to the Harpers’ adult daughter, a student on a 17.5% rate, the tax would be 675. The difference — $4,515 in a single year — repeats every year the trust holds the portfolio. Over a decade i,t is the price of a good used car.
What Inland Revenue says, in plain terms
IS 12/02 is clear on one thing: deemed income does not exist in trust law. Trustees can only give beneficiaries what the trust actually holds. So the $21,000 cannot be allocated “as such”. What the trustees can do depends entirely on the deed, and Inland Revenue gives three examples:
• Deed silent, fixed entitlements (Example 1): the trustees are locked to trust-law income. The excess is taxed to the trustees at 39%. No resolution can fix it.
• Deed defines income as tax income (Example 2): the trust-law and tax-law figures match, so allocation works — but only if the trust actually has the money.
• Discretionary deed with power to pay capital (Example 3): the trustees may pay a real amount from the fund — capital or reserves — and resolve that it is the payment of the deemed income for tax purposes. Inland Revenue accepts that as beneficiary income.
Every post 2020 Ross Holmes trust deed is an Example 3 deed. The trustees may pay, apply, or set aside both income and capital for any primary beneficiary, and may decide whether a return on an investment is income or capital. That is why a client who asked us this question last week could be told: yes, your deed works — with a step added.
Why we recommend a small variation of the Trust deed
Our post-2020 deeds work because of their general powers. But general powers have to be argued from; express words do not. The new version of our Second Schedule adds a short clause saying expressly that the trustees may treat amounts taxed as income under the Income Tax Act as distributable income, may pay amounts (including from capital) up to the excess of tax income over trust income, and may resolve that those payments are the payment of that income for tax purposes — with a guard so that no fixed entitlement in the deed is enlarged by accident. If Inland Revenue ever reviews the allocation, the trustees point to a clause, rather than a chain of reasoning. For clients on our latest deed format — a First Schedule and a Second Schedule only — the variation replaces the whole Second Schedule with our current one, so you also receive every other improvement described in Why we keep improving your trust deed — and what’s new.
The annual income allocation minute — the process
A resolution is needed every year there is a gap. The steps are simple, but each one matters:
1. Get the figures from your accountant. Trust-law income, tax-law income, and the FIF amount that makes up the difference. This is expert accounting work — the allocation decision starts there.
2. Confirm the trust actually holds the money. Cash, or an existing beneficiary current-account balance that can be credited. A notional amount cannot be paid.
3. Pass the special-form minute before the deadline. Broadly six months after balance date — 30 September for a 31 March year — or by the date the trust’s return is filed if that is later (Inland Revenue’s IR288 trusts guide sets out the formula).
4. Say the magic words. The minute must credit real amounts to named beneficiaries and state that those amounts are paid as the income deemed to arise under the Income Tax Act 2007 for that year. Crediting a current account is enough; no cash needs to move.
5. Record it. Enter the credits in the trust’s accounts and keep the minute with the trust records — section 45 of the Trusts Act 2019 requires it anyway.
The one thing most people get wrong
Trustees assume the accountant can allocate the FIF income in the tax return. They cannot. Inland Revenue rejects that view in terms: a tax-return adjustment is not an allocation, because nothing happened inside the trust. Equally, a general power to distribute is not enough on its own — without a minute that draws the explicit link, the payment risks being treated as a capital distribution and the FIF income lands back on the trustees at 39%. Two clients with identical deeds and identical portfolios can end up thousands of dollars apart, purely on whether the right piece of paper was signed by 30 September.
Topic 2 — Own overseas shares yourself? The same rules tax you
The FIF rules are not a trust problem. They apply to any New Zealand tax resident who holds foreign shares or funds — including the US and global index funds sold through the popular investing apps. Whether they bite depends on one number: the cost of all your overseas holdings at any time in the year.
• You are outside the rules if your overseas holdings cost less than $50,000 in total (the threshold applies to individuals and certain family trusts). You simply return the dividends you receive.
• You are inside the rules once cost reaches $50,000 at any point in the year — even for a day. Most Australian shares listed on the ASX are exempt and do not count.
• You are inside from day one if you are a trust that does not qualify for the threshold or a company.
Priya’s portfolio — a worked example
Priya, a 34-year-old engineer on the 33% rate, has built up $80,000 of US index funds through an investing app. The funds paid her $1,400 in dividends. Because her holdings cost more than $50,000, the FIF rules apply: under the fair dividend rate method, her taxable income is 5% of $80,000 = $4,000, and the tax is $1,320 — nearly the whole of the dividend she actually received. Individuals and eligible family trusts may use the “comparative value” method instead in a year when the portfolio returned less than 5%, so in a flat or falling year, Priya’s tax can fall to nil. What she cannot do is ignore the rules because “I only got $1,400”.
The consequence of getting this wrong is not just tax: undeclared FIF income attracts shortfall penalties and interest, and Inland Revenue receives investment data from platforms and overseas tax authorities automatically. If you crossed the $50,000 line in the last few years and never returned FIF income, talk to your accountant about a voluntary disclosure before Inland Revenue writes first.
What you can do — and where we can help
For trusts: ask your accountant, this year and every year, whether the trust’s tax income exceeds its trust income. If it does, the trustees need the allocation minute before the deadline. If your deed is one of ours, it already supports the allocation. For clients on our latest deed format (a First Schedule and a Second Schedule only), we will vary your trust deed to replace the Second Schedule with our current version — including the new deemed-income clause — for $360, and that fee includes the draft income allocation minute for your accountant to complete each year. It does not include our time discussing these issues with you or our time discussing the amended Second Schedule. Our time is charged for. If your deed is in an older format or was prepared elsewhere, we will review it and provide a quote. See our trust and estate planning services.
For personal investors: the FIF calculation is your accountant’s territory, and we will say so plainly — Ross Holmes Virtual Lawyers Limited are not tax specialists. Where we help is upstream: whether the investments should be held personally, in a trust, or in a company in the first place, and what that choice means for asset protection, relationship property and your estate plan.
Questions clients ask us
Do we actually have to pay the trust money to our children?
No. Crediting the amount to the beneficiary’s current account with the trust is a payment for these purposes. But the beneficiary must genuinely be entitled to it — if the money is quietly resettled or the beneficiary is never told, Inland Revenue may treat the allocation as a sham.
What if the trust has no spare cash?
Then there may be nothing to allocate. The trust must hold a real amount — cash, reserves or a current-account balance — at least equal to the FIF income being allocated. This is one reason to raise the question with your accountant before balance date, not after.
Can we allocate trust income to our grandchildren?
Only usefully if they are 16 or older. Beneficiary income of a child under 16 is taxed at the trustee rate of 39% under the minor beneficiary rule, so allocating to young grandchildren saves nothing.
We missed the deadline last year — can we fix it?
Not for that year. Once the allocation window closes, the excess is trustee income for good. You can, however, get this year right: the minute is short, and the deadline is predictable.
Is this the accountant’s job or the lawyer’s?
Both. Your accountant calculates the figures and advises whether and how much to allocate. We make sure the deed permits it and that the minute is in the form Inland Revenue requires.
Where to read more
• IS 12/02 — Inland Revenue’s Interpretation Statement on deemed income and beneficiary income
• IR461 — Guide to foreign investment funds and the fair dividend rate
• IR288 — Trusts and estates income tax rules (allocation deadlines)
• Inland Revenue — Getting beneficiary income (plain-language page)
• Income Tax Act 2007, section HC 6 — legislation.govt.nz
One change to watch
Budget 2026 proposed lifting the $50,000 FIF threshold to $100,000 from the 2026–27 year, and a new “revenue account method” for recent migrants took effect on 30 March 2026 (Inland Revenue policy information sheet). Whether the higher threshold is law for your year is a question for your accountant — and it does not help a trust that has no threshold at all.
If your trust owns overseas shares, email rossholmes@rossholmes.co.nz or call +64 9 415 5700 and ask for the $360 Second Schedule update — it includes your annual income allocation minute.
Ross Holmes Lawyers is not a tax or GST specialist. Everything in this article about the amount of tax, the FIF calculation and whether to allocate income in a particular year must be confirmed with your accountant or a tax specialist before you act. We prepare the deed and the minute; your accountant provides the figures and the tax advice.
This article is general information only and is not legal or tax advice. Your situation is unique; please obtain specific advice before acting. Tax positions described are current as at 31 August 2026 and may change.
About the author. Ross Holmes is the Managing Director of Ross Holmes Virtual Lawyers Limited and a contributing author to the LexisNexis Law of Trusts (New Zealand). The firm advises on property and conveyancing, estate planning (trusts and wills), personal law, business law, seniors law and estates, entirely online, from Auckland and Rotorua. rossholmeslawyers.com · Contact us
