There is no test of residence for trusts (other than unit trusts, which are trusts that are treated as companies).  This is because a trust is not a legal entity that can exist independently of the trustee and beneficiaries.  Unlike the case with, say a company, that si recognised as a legal person at law.

The absence of a test of residence , or legal personality, means that care is necessary when a settlor or trustee moves from one jurisdiction to another as it can be possible for a trust to inadvertantly acquire an additional tax residence.

Trustees don’t determine where a trust is resident

The policy behind the taxation of trusts in New Zealand is that the residence of a trustee does not determine tax liability.  Instead the liability for taxation turns in most part on the residence of the settlor (as the trust’s economic agent) or the beneficiary in receipt of beneficiary income. 

This means that income sourced in New Zealandis taxable regardless of where the recipient of that income is resident and regardless of whether the recipient derives the income in the capacity of beneficiary or trustee.

However, the taxation of foreign source income generally depends on where the recipient truustee or beneficiary (as relevant) is resident.

The rules that determine residence for a person are not modified to reflect a person’s capacity as a beneficiary, trustee or settlor. 

Taxation of beneficiary income depends on where the beneficiary is resident

The taxation of beneficiary income depends on the residence of the beneficiary and the source of the income.  This is the case regardless of where the trustee and settlor are resident. 

Foreign sourced beneficiary income is taxable in New Zealand if the beneficiary is resident inNew Zealand. However, foreign source income derived by a non-resident beneficiary is not taxable inNew Zealand. 

Beneficiary income sourced in New Zealand will be taxable whether or not the beneficiary is resident in New Zealand.  

Taxation of trustee income depends on the settlor’s residence

The rules that determine when beneficiary income is taxable do not apply in the same way to trustees.  Instead, a trustee’s liability to income tax on foreign income will generally turn on the residence of the trust’s settlor during the income year in question.

With some limited exceptions foreign sourced trustee income derived by a non-resident trustee is subject to income tax in New Zealand if at any time in an income year, a settlor of the trust  (who is not a transitional resident – that is someone who has been overseas for ten years or more and is only taxable for up to four years on income earned in New Zealand), is resident in New Zealand.  This is the case even if there are one or more other settlors who are non-resident.  A settlor for these purposes is anyone who has given property to the trust and can include a person who is not named as a settlor in the deed of trust.

Trustee income sourced in New Zealand is is taxable regardless of whether or not the trust has a New Zealandresident settlor.

There are also rules that will make foreign sourced trustee income  subject to income tax in New Zealand if a settlor of a trust dies resident in New Zealand.  

Special rules apply to the taxation of trusts settled before 17/12/87, which was when the current trust regime was introduced.  Under these rules amounts that otherwise might be taxable in New Zealand will not be.    For more information regarding settling a foreign trust see www.securetrustees.co.nz

Settlor’s can be liable for income tax as trustee’s agent

A resident settlor can have a residual liability to income tax if there is no resident trustee.  A settlor liable for income tax is liable (subject to a number of exceptions) as the trustee’s agent.   Where there is more than one settlor all the settlors can be liable. 

Care is requried when a trustee or settlor moves to or from New Zealand

As a result of New Zealandpolicy, which provides that tax liability turns on the residence of the beneficiary or settlor, there are certain tax planning opportunities and pitfalls to consider when acquiring or losing New Zealan dtax residence.

However, as all jurisdictions do not tax trusts on the same basis, particular care must be taken whenever settlors or trustees migrate from New Zealand (even if there will still be New Zealand resident trustees) as the treatment of trusts in different jurisdictions can depend on factors that are different to those applied in New Zealand. For example a trust could be a complying trust in New Zealand because of the presence of New Zealand resident settlors; but also subject to taxation in a foreign jurisdiction due to the presence of off-shore resident trustees.

There can be tax consequences for a trust when a settlor migrates from New Zealand

If all of a trust’s settlors cease to be tax resident in New Zealand there are no immediate tax consequences because of this.  However, when there is no resident settlor, a trust that would otherwise be a complying trust can become a non-complying trust at the time of a distribution if the trustee has received any foreign source income while there has been no New Zealand resident settlor who is not a transitional resident.

Certain distributions from non-complying trusts are taxable distributions that are taxed at the rate of 45%.  

This is obviously a significant disadvantage should complying status be lost. However, the corollary position is that any foreign sourced income is exempt income, once there is noNew Zealand resident settlor. 

These outcomes are the case regardless of the trustee’s residence.

Where a trust wishes to retain complying status it is possible for an election to be made so that a foreign trust can be treated as a complying trust in respect of income derived by the trustee from the date of the election. 

It may also be possible to ensure a new settlement onto a trust by a person who will remain resident inNew Zealand.  However, care must be taken with this approach to ensure that such a settlement is neither attributed to the non-resident settlors under the nominee provisions nor treated as avoidance under the general anti-avoidance provisions. 

The best outcome for any trust that will be left with no New Zealandresident settlors will depend on a number of facts.

 Specific advice should be sought whenever it is possible that all the settlors will emigrate.

A trust settled prior to a settlor acquiring  a New Zealandtax residence is a foreign trust. 

Foreign trusts are only taxed in respect of income sourced in New Zealand. Non-resident beneficiaries of foreign trusts are only subject to income tax on distributions of beneficiary income that is sourced inNew Zealand.

Trustees of foreign trusts are only taxed on income from that trust that has a New Zealand source.  This is the case regardless of where the trustee is resident.

If a settlor of a foreign trust acquires New Zealand tax residency the trust can only remain a foreign trust for up to 12 months from the date a settlor acquires New Zealand tax residency.

If no election is made within the 12-month period a foreign trust will become a non-complying trust               

All distributions of beneficiary income from non-complying trusts are taxable in New Zealand at the beneficiary’s marginal rate.  However, distributions of accumulated income and capital gains are subject to tax at the rate of 45%.

A foreign trust only comes under the New Zealand tax regime if a settlor of that trust becomes resident in New Zealand.  A foreigh trust will not be subject to an income tax liability in New Zealand only because that trustee has become tax resident in New Zealand.

Trustee migration can have tax consequences

Although the arrival of a trustee in New Zealand does not cause tax consequences by itself, the departure of a single trustee can have tax consequences for a trust if the trustee moves to a jurisdiction where a trust is taxed based on the trustee’s residence.

This can be the case regardless of the fact that the trust’s settlor remains in the jurisdiction where the trust was settled; or if other trustees do not migrate.

The different tests of residence are of particular relevance toNew Zealandresidents due to the relative ease with which New Zealanders migrate to Australia, which like most international jurisdictions taxes trusts in terms of residence or control.  For Australian tax purposes a trust can be regarded as resident in Australia for tax purposes if a single trustee is resident at any time during an income year or if the central management and control of the trust was in Australia at any time during an income year. 

Even where a trust has no income, tax residence in another jurisdiction can still result in liability for tax.  For example, in Australi athe capital gains exemption that applies to a person’s primary residence is only available to individuals in their personal capacity and will not apply to a person in the capacity as a trustee. 

Therefore, any trustee who is migrating from New Zealand, whether to Australiaor elsewhere, should seek tax advice regarding the effect the trustee’s migration will have on the trust.

For the same reason the settlor or remaining trustee of any trust where a trustee has migrated should also seek advice to ensure that the trustee does not have a previously unrecognised off-shore tax liability. 

References

• Income Tax Act 2007, s CV 15, HC 23, HC 30, YD 1, YD 2
• Vicki Ammundsen, Taxation of Trusts, ed 2 (2011), chapter 8
• www.securetrustees.co.nz