Foreign Trusts in New Zealand

What the different types of Trusts for Tax purposes?

There are three types of trust for New Zealand income tax purposes:

1.  Complying trust (formerly qualifying trust) - one which has been taxed in New Zealand on ALL (worldwide) trustee income since the date it began. These include trusts settled by New Zealand residents with New Zealand trustees, estates of people who were New Zealand residents when they died and other trusts which have elected to become complying trusts. A trust remains a complying trust if, since settlement of the trust, the trustees have satisfied all obligations in respect of its income tax liabilities.
2.  Non-complying trust (formerly non-qualifying trust) - If a trust ceases to meet the conditions for a complying trust in an income year, it will no longer be a complying trust - it will generally become a non-complying (formerly non-qualifying trust). For example, if the tax on a complying trust's trustee income is not paid, or if the trustees cease to be New Zealand residents. A non-complying trust is any trust that is neither a complying trust nor a foreign trust at the time it makes a distribution. It is generally a trust that has a resident settlor, has been established overseas with non-resident trustees, and has not been liable for New Zealand income tax since it was first settled. It also includes a trust where its trustee income has been liable to full New Zealand tax but the trustees have not paid the tax.
3.  Foreign trust - Foreign trusts are trusts that are established in New Zealand but no settlor (the person who settles assets on the trust) is resident in New Zealand at any time. A foreign trust may have one or more trustees resident in New Zealand.

This article only deals with Foreign Trusts.

What is a Foreign Trust?

A foreign trust is a trust with a foreign settlor. Foreign trusts with New Zealand-resident trustees are exempt from tax on foreign-sourced income.

What are the current disclosure requirements?

The Tax Administration Act 1994 requires foreign trusts with a New Zealand-resident trustee to disclose certain information to the Commissioner of Inland Revenue upon establishment. The information required to be disclosed upon establishment is the name of the foreign trust, the name of a New Zealand trustee, and whether there is an Australian settlor.
The Tax Administration Act also requires New Zealand-resident trustees of foreign trusts to keep records in relation to the foreign trust like the

• trust deed, and
• names and addresses of settlors (if known) who make a settlement on the trust
• Names and addresses of the beneficiaries who receive a distribution.
• Tax Information Numbers (This is the number used to identify settlors and beneficiaries to the tax authority in the foreign jurisdiction)

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These records must be provided to Inland Revenue on request. If the information provided upon initial disclosure has changed, the New Zealand-resident trustee of a foreign trust must update the information.

What are the sanctions for non-compliance?

There are two forms of sanctions for non-compliance under the current rules.
First, an intentional breach of a requirement to supply information to IRD may result in a fine of up to $50,000 AND imprisonment for up to five years, and
Second, the foreign trust loses its tax exemption on foreign-sourced income if:

• ​a trustee is convicted of an offence for not providing information requested by Inland Revenue; and
  
• the trust does not have a “qualifying resident foreign trustee” for an income year. (A qualifying resident foreign trustee is a member of a specified professional body – for example, a member of the New Zealand Law Society or Chartered Accountants Australia and New Zealand).

What information is shared by IRD with other tax jurisdictions?

Inland Revenue shares information about foreign trusts with overseas tax authorities in countries with whom New Zealand has an agreement which includes information sharing provisions. This information is shared when requested by the overseas tax authority or proactively in instances where Inland Revenue considers that the information may be of interest to that tax authority.
If the trust is identified as a Foreign Trust - key information on identities (and Tax Identification Numbers etc) of the trustees & beneficiaries, sources & details of trust assets, trustees and beneficiary incomes and taxes paid are shared automatically using CRS system (Common Reporting Standards System). This is so even you are identified as a foreign citizen in an account with a bank or other New Zealand Financial Institution.
If you are a New Zealand citizen and / or tax resident and hold bank accounts in foreign countries the information held by those banks and financial institutions are also shared with the New Zealand IRD.
If the funds or assets are held by a person or an entity other than a financial institution such as an agent, custodian, nominee, signatory, investment advisor, or intermediary, the trace-through rule applies to disclose the details of the ultimate beneficiaries.

What are the new rules?

Following the damning disclosers from the Panama Papers, to maintain New Zealand's reputation, in April 2016 the Government instituted an enquiry into the Foreign Trusts Disclosure Rules and made recommendations regarding disclosure rules and other related matters.
On 13 July 2016 the Government announced it would adopt the Inquiry’s recommendations.
New information disclosure rules are proposed for foreign trusts with a New Zealand-resident trustees. These include

1. requirements for the trust to register ($270) with Inland Revenue,
2. file annual returns ($50) and pay registration and filing fees.
3. current “safe harbour” for qualifying resident trustees of a foreign trust be removed.

​In addition, the register of foreign trusts would be shared with certain New Zealand government agencies (Like New Zealand Police and Department of Internal Affairs).
The resident trustee of the foreign trust would need to comply with the registration and filing obligations in order to qualify for the exemption from tax on foreign-sourced amounts. To qualify for the exemption for tax on foreign-sourced income, resident trustees of a foreign trust will have to be compliant with the disclosure requirements for registration, and will also need to fulfil their annual filing obligation.

 Since when the recommendations will apply from?

For all practical purposes, the 1st return with all the required disclosures will have to be filed by 30 June 2018.
Key message
​Overall the simple message is this: If you are a foreign citizen having a trust in New Zealand or a NZ citizen / resident acting as an agent, nominee holding assets in trust for a foreign citizen, consider whether the disclosure rules apply to you. If you're unsure, then check in with your Core Business Services specialist to help you get certain.

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Disclaimer
The above publication discusses income tax issues generally and is not intended to be specific tax advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action.