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Trustees, Trusts

What do trustees need to know about FATCA?

First off, what is FATCA?  FATCA is an acronym that stands for Foreign Account Tax Compliance Act.  This is an American initiative, with global reach, that places on-going obligations on non-US financial institutions to verify and review accounts to establish whether the account is held or ultimately controlled by a US person.

Unless the U.S. exempts them from FATCA reporting, reporting obligations apply to non-US financial institutions such as:

  • banks
  • insurance companies
  • custodial institutions
  • hedge funds
  • mutual funds
  • superannuation funds, and
  • private equity firms.

FACTA doesn’t change any substantive tax rights that the United States or New Zealand has in respect of its citizens or residents, nor does it require us to act as a tax collection agent for the United States Internal Revenue Service. What FATCA is, is  a reporting regime to make sure that U.S. persons (and New Zealanders with accounts in the U.S.) meet their tax obligations.

Due to an intergovernmental agreement (IGA) with the US, no individual’s accounts held with New Zealand financial institutions (even those accounts held by U.S. taxpayers) will be subject to the 30% penalty that can be imposed by the U.S. FATCA legislation.

In accordance with the IGA, agreed between New Zealand and the U.S., relevant account information will be collected by financial institutions

For an excellent overview of FATCA see the paper written by Cheng & Russ for the NZLS Tax Conference, which was held in Auckland last week (reference below).

Whether the reporting obligations could spread as wide as solicitor’s trust accounts is not entirely clear.  Although it is noted that the Law Society’s position is that solicitors are not financial institutions and are therefore beyond the scope of FATCA.

What however, is the position of a trust where a financial institution is a trustee or manages trust assets?  While the position is not entirely clear, vigilance is necessary to ensure the correct approach is taken.  Although the issue is primarily for the financial institution, trustees ought not be complacent and should be prepared for future information requests.

Helpfully, given the global scope of FATCA, the issues are being grappled with and addressed on a global basis.

In this regards it is useful then to note that in the United Kingdom  HM Revenue & Customs’ has issued new guidance on the US Foreign Account Tax Compliance Act that clarifies that UK family trusts will be classed as professionally managed (and thus need to register as an investment entity) where trustees have appointed a financial institution to carry out the day to day functions of the trust, or where the financial institution manages the financial assets and the investment strategy.



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