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NZ Foreign Trust Disclosure Regime – two years on – are you complying?
A number of you will no doubt remember, the release of the Panama papers in early 2016, which suggested that NZ might be considered a tax haven, due to its taxation rules with respect to foreign trusts.
Naturally the resulting public outcry saw the appointment of an independent reviewer by the Government, whose task it was to review our taxation rules as they applied to foreign trusts, and to recommend any amendments considered appropriate to rebut this “tax haven” contention.
The outcome of the review, was a recommendation that no changes to the actual taxation of foreign trusts themselves were warranted, but instead the introduction of a more robust disclosure regime, which would result in Inland Revenue collecting detailed information in relation to foreign trusts operating in NZ, which could then be passed on to foreign taxing jurisdictions, who could then use that information to ensure their domestic tax residents were being fully compliant with their local tax obligations.
As a consequence of the recommendation, legislation was passed in February 2017, requiring foreign trusts which were in existence prior to the legislation’s enactment date (21st February 2017), to register their existence with Inland Revenue by 30th June 2017, and for those settled post the date of enactment, to register within 30 days of settlement date.
There was also however a four year and thirty day concession period in relation to the 30th June 2017/30 day registration date deadlines, which could have application in scenarios where all the trustees of the trust were natural persons, no trustee was a professional trustee (one in business of providing trustee services), and no trustee had held the trustee role for more than four years and thirty days before enactment of the legislation. The concession period commenced on the date the foreign trust first had a NZ resident trustee.
So what was all the fuss about initially?
Well NZ’s trust taxing rules operate differently to most foreign jurisdictions, because unlike those regimes which look to tax the worldwide income of the trust based on the residence of the trustees, NZ taxes its trust’s under a settlor based regime.
Practically what this meant, was that a person considered non-resident for NZ tax purposes, could effectively settle a trust in their home jurisdiction, say Australia, appoint NZ resident trustees to manage the investments of the trust which were all located outside of NZ (say a rental property situated in Vanuatu), and potentially have no taxes imposed on the trust income by either jurisdiction.
The trustees of the trust would have no tax filing obligations in Australia, because they were not tax resident there, and equally they would have no tax filing obligations in NZ, because the settlor was not a NZ tax resident.
Now one could argue that NZ’s foreign trust regime would only provide potential “tax haven” benefits, where the investments of the trust in the aforementioned scenario were held in either a no-tax jurisdiction like Vanuatu, or in a foreign jurisdiction that had a lower tax rate than Australia and NZ. If the investment property was owned in NZ for example, then the rental income of the foreign trust would still be taxed at rates equivalent to Australia (a flat 33% being NZ’s trustee tax rate), because NZ’s source rules provide a taxing right over the income in this regard.
Furthermore it could be said that this structure would only provide benefits to the Australian resident settlor, to the extent that no distributions were made by the foreign trust back to an Australian resident beneficiary, as like NZ, Australia would likely treat these distributions as “taxable distributions”, and assess the beneficiary for income tax accordingly.
Now I have used the term “foreign trust” a number of times in this article, so just to clarify the type of trust that will meet this definition, NZ tax rules define a foreign trust as one where no settlor of the trust has been resident in NZ, between the date the trust was first settled and the date of the distribution in question. If the trust satisfies the foreign trust definition, then only NZ sourced income is subject to NZ taxation.
In this regard, the new rules do not attempt to alter the way foreign trusts are subject to taxation in NZ, instead they introduce a greater disclosure regime, which if not complied with by the trustees, will result in the trust losing the income tax exemption presently applying in respect of foreign sourced income, with the consequence that the trustees of the trust will become liable to taxation on the trusts worldwide income.
So what should you be doing if the new disclosure regime does apply to you (please do not hesitate to contact us if you are not sure in this regard):
- Each foreign trust must have a resident contact trustee, responsible for any communication with Inland Revenue;
- An annual return must be filed within 6 months of the foreign trusts balance date (30 September if no balance date), and include a copy of the financial statements and details of any settlements or distributions made during the past year;
- Payment of a registration fee of $270 and annual filing fees of $50 (all fees waived for foreign trusts where solely natural person, non-professional trustees); and,
- Upon registration, you must have provided:
- a copy of the trust deed;
- identifying particulars and contact details for settlors, trustees and beneficiaries; and,
- information about settlements made from date of formation until the date of application (although reduced disclosures where all natural person, non-professional trustees).
If you would like any additional information with respect to the commentary provided in this article, please do not hesitate to contact us. Equally we would welcome the opportunity to assist you with your registration obligations, or to simply provide confirmation to you of exactly what your present obligations are.