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Foreign trust registration – who knows the whole truth?

As the 30 June 2017 deadline passed for the registration of foreign trusts with Inland Revenue under recent legislation following recommendations made by the Shewan Report, the unsurprising fact that fewer than 3000 of the more than 11,750 foreign trusts have formally registered has been seized on by politicians (and anyone else wanting to vent their opinion, as is today’s fashion) capitalising on the perceived implications. See Foreign trusts whittled down after new rules.

Indeed it seems that some 5000 never even contacted Inland Revenue to say they were staying or going. It is also likely that there will be late registrations so the number may rise somewhat.

The problem: does anyone really know the whole truth behind the numbers? The writer suspects not. Have some of the foreign trusts exiting New Zealand been fronts for nefarious dealings, such as money laundering, tax evasion and other morally questionable behaviours? Surely no one would genuinely doubt it, but what about how many – the bulk of the apparent departees, or just the tip of the iceberg?

The cost of registration has been cited as a reason in some quarters, although this seems doubtful except in the case of non-operative trusts.

To begin with let’s look at the unknowns. What are the other reasons why thousands of foreign trusts would fail to register?

  • Foreign settlors simply unaware of the need to register. There is no guarantee that communications from Inland Revenue in advance of the changed registration requirement actually reached the relevant foreign parties, and indeed there is anecdotal evidence of letters going astray. Nor should it be assumed that all NZ resident trustees are equally diligent in their dealings with offshore parties, let alone their knowledge of the changed compliance requirements.
  • Foreign trusts that never actually settled in the first place – it would not be surprising if there were a large number of these, set up in anticipation of being used but eventually not activated by the settlement of assets.
  • Foreign trusts that had moved assets offshore, wound up or otherwise become moribund (such as resettlements onto new structures) even before the legislative changes.
  • Settlors of foreign trusts that are also complying trusts under New Zealand tax law figuring that the change did not apply to them – put another way, the whole exercise was never about trying to “catch” foreign trusts owning assets in New Zealand and/or already paying tax on New Zealand income. Just to be clear, there are many foreign trusts to which this applies (and indeed some of the examples publicised in the wake of the Panama Papers were trusts owning assets and paying tax in New Zealand, regardless of the motives of the settlors in their own countries).

Of course this ignores the fact that there will clearly have been some foreign trusts settled in New Zealand that did so for reasons of secrecy that might be nothing to do with hiding ill-gotten assets or evading tax, but rather about morally legitimate concerns such as for the safety of families in war-torn or dangerous countries, for example. People may be motivated by secrecy for a whole range of reasons, some dubious but definitely not all. Who is morally qualified to be the judge?

So how many money launderers, tax evaders or illegal arms dealers have fled the comforting secrecy of New Zealand’s previous foreign trust regime? Many thousands or the tip of the iceberg? Who knows?

Well, let’s admit that no one actually knows.

 

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