What is a Foreign Trust?
A foreign trust is one where there has never been a New Zealand resident Settlor. (a
“settlor” is usually the person who creates the trust by putting their personal assets
into it).
A non-resident can settle a trust that has non-resident beneficiaries, but has a New
Zealand resident Trustee. These trusts can be trust-effective in certain offshore
jurisdictions. However, such trusts are not treated as New Zealand trusts because New
Zealand taxes trusts based on the residence of the Settlor, not the Trustee, as do other
jurisdictions.
The Trustees are only taxable in New Zealand on income that has a New Zealand
source. However, the Trustees will only be eligible for a tax-exemption on the Trust’s
foreign-sourced income if they register the Trust with Inland Revenue.
Historical Perspective
Over a year ago foreign Trusts became a “hot potato” following the release of the
“Panama Papers” regarding New Zealand’s involvement in the foreign Trust “industry”.
The furore over the foreign Trusts in the past couple of years and the suggestion that
they were used as a ‘tax dodge” was clearly misdirected because such Trusts in general
do not have New Zealand sourced income and therefore have no exposure to New
Zealand tax. However, the way in which New Zealand tax law is applied to foreign
Trusts, coupled with New Zealand’s legal environment and previously minimal
disclosure requirements, made New Zealand attractive to wealthy foreigners seeking to
hold assets through offshore Trusts, and so avoid their tax obligations in their country
of residence. The Panama Papers highlighted the reputation/risk this has caused to
New Zealand.
New Zealand does in fact have a substantial foreign trust industry. Inland Revenue
records indicate that approximately 12,000.00 foreign trusts with a New Zealand
resident trustee have filed an IR607. The Department estimates that the New Zealand
foreign trust industry generates approximately 24 million in revenue per annum,
although this may be as much as 50 million per annum.
Accordingly, substantial changes to foreign trusts were introduced over 10 years ago
and since 1 October 2006 the New Zealand resident Trustees of foreign trusts have had
to disclose certain information to Inland Revenue within 30 days of the creation of the
Trust or a Trustee’s arrival in New Zealand. This is achieved by the use of form IR607-
“Foreign Trust Disclosure” and must include the following information:
- The name or other identifying particulars of the Trust.
- The name and contact particulars of the resident foreign trustees.
- Whether the Settlor is a resident in Australia; and
- If relevant, the basis of which a Trustee claims to be a qualifying resident
foreign Trustee.
Current legal position
Following disclosure of the Panama Papers, the “Shewan Report” was commissioned by
the Government, which recommended administration and disclosure changes for
foreign trusts. These have now been incorporated in the Taxation (Business Tax,
Exchange of Information, and Remedial Matters) Act (21 Feb 2017), which requires the
following additional information to be supplied to Inland Revenue:
- Details of each settlement made on the Trust (other than “minor services”
provided to the Trust for less than market value); - The name, address, jurisdiction and tax identification number of every Settlor,
and every person with a power to add or remove Trustees or beneficiaries; - Details of beneficiaries; and
- A copy of the Trust Deed and details of any alterations.
The above details must be properly registered with Inland Revenue (using IR 607A and
900A) within 30 days of the Trust being established at a cost of $270.00 and future
annual returns must be filed at a cost of $50.00.
Where the New Zealand tax Trustees of a foreign Trust do not comply with either the
registration or annual return requirements, the foreign Trust will be subject to a New
Zealand income tax on its worldwide income. However, if the breach was inadvertent
and was corrected immediately, then this sanction will not apply.
Foreign trusts in existence as at 21 Feb 2017 needed to register by 30 June 2017. If
not, provided certain conditions are satisfied, the registration period is extended a
further 4 years from the date the trust was established.
The current sanctions for intentional non-compliance (a fine of up to $50,000.00) will
continue to apply. Extreme care and vigilance is therefore needed.
Taxation
Determining, and accounting for, distributions made by a foreign trust can be
extremely complex. What beneficiary distributions are taxable and which are tax-free
is subject to an “ordering rule”, which says that distributions are treated as coming in
first from taxable reserves before they can be applied against non-taxable reserves.
As the accounts of such a Trust are not always prepared with this ordering rule in mind,
which is especially the case when dealing with New Zealand resident beneficiaries of a
trust established overseas, this can be very difficult. That difficulty is compounded
because often the trust’s accounts are not prepared in English.
Immigrating Settlors – what happens if one arrives in New Zealand and stays?
When the Settlor of a foreign trust becomes a New Zealand resident, the trustees have
12 months to elect that the Trust be treated as a “qualifying trust”. If no election is
made, the Trust becomes a non-complying Trust with significant additional tax payable
by its beneficiaries on asset distributions to them (i.e. 45%).
Conclusion
A lack of care by trustees of a foreign trust may quickly result in non-compliance with
our tax laws. If you haven’t already done so, we strongly urge all trustees of a foreign
trust to engage legal and accounting advice immediately, and if you have, to ensure
regular annual trustees’ meetings occur with both your trust’s legal and accounting
advisors present.
Every situation is unique so please discuss your particular case with a professional advisor who can provide you with a tailored solution. Please contact Pat Rotherham at Parry Field Lawyers patrotherham@parryfield.com or 03 348 8480
