New Zealand’s tax treatment of trusts has made front page headlines this week due to its taxation treatment of foreign trusts.
To quote the New Zealand Herald article on the “Panama Papers”:
“New Zealand’s 12,000-plus offshore trusts pay no New Zealand tax on foreign earnings. Their beneficiaries are not registered and their accounts are not filed with any public body. New Zealand regulators may demand this information, but it is not disclosed to foreign governments.”
But it takes more to make a tax haven than the name. The significant words above are “foreign earnings”.
So what is a foreign trust – and why does a foreign trust pay no tax in New Zealand?
To answer this question it is important to understand a little bit about how New Zealand taxes trusts. There are three trust classifications for New Zealand tax purposes:
- complying trusts (most New Zealand settled trusts fall into this category). A complying trust pays tax on trustee income, distributions of beneficiary income are taxable to the beneficiary; and capital distributions are not subject to tax
- foreign trusts – a trust where there is no resident settlor from the later of 17 December 1987 or the date on which the first settlement was made onto the trust; up until the date of any distribution. Note that while income not sourced in New Zealand is not taxed – there is a regime of taxable distributions that are subject to tax in New Zealand
- non-complying trusts (trusts that are neither complying or foreign) – distributions other than beneficiary income from non-complying trusts can be taxed at rates up to 45%
The trustee of a foreign trust must be a New Zealand resident trustee (resident foreign trustee). The resident foreign trustee is typically, but not necessarily, a corporate trustee that is incorporated in New Zealand. All New Zealand incorporated companies must have a director who:
- lives in New Zealand or
- lives in Australia and who is also a director of an Australian incorporated company.
Foreign-sourced income derived by the trustee of a foreign trust is exempt from income tax in New Zealand, provided the settlor is not resident in New Zealand. Note that the classification as a foreign trust can change – for example if a settlor becomes resident in New Zealand.
Income derived in New Zealand by the trustee of a foreign trust will be taxable.
Tax haven – or not?
While a foreign trust will not be subject to tax in New Zealand if no income is derived in New Zealand – just because a trust is a foreign trust for New Zealand tax purposes does not mean that the trust does not have taxation oblations in other jurisdictions. Any trustee of a New Zealand foreign trust needs to be very aware of this.
Any other reasons to have a New Zealand resident trustee
New Zealand is a sovereign state in the South Pacific. The country is politically stable and has a developed legal system, with respect for the rule of law. There is an independent judiciary, and a substantially statutory system of law providing certainty as to outcomes, particularly in regard to the taxation of trusts
New Zealand has a sophisticated banking system and is an international financial services centre with a significant history of administering trusts. Any questions as to how visible trusts are can be swiftly answered by reference to the continually increasing number of trust related cases passing through the courts.
New Zealand has no public register of trusts and the Law Commission has confirmed that it does not recommend any such register; accordingly New Zealand can offer a significant level of privacy. However, importantly the New Zealand courts retain an inherent jurisdiction to supervise trusts and beneficiaries can seek the assistance of the court either pursuant to the inherent jurisdiction or in accordance with the Trustee Act 1956.
Foreign trusts can be tax effective in New Zealand and enjoy the benefit of a New Zealand resident trustee. However, it should not be presumed that tax obligations do not exist elsewhere. New Zealand may often be considered to be at the end of the earth – and how often do you read a book or watch a movie where someone who de-bunks to the ends of the earth has retired to New Zealand.
Resident trustees of foreign trusts have disclosure obligations (see Tax Administration Act 1994, s 59B(1)
The reality is, it is a shrinking earth and not as much a haven as might be thought.
Also see – NZ trusts prone to abuse – tax expert
- Panama Papers: Mossack Fonseca leak reveals New Zealand used to keep tax secrets
- Panama firm’s clients named in worldwide leak
- Income Tax Act 2007, s HC 11
- Erceg v Erceg  NZCA 7