October 26 2016
This question is in the government’s spotlight. The problem is foreign trusts. A foreign trust is a trust held in New Zealand where all the settlors live outside New Zealand. We assume income earned by those settlors is taxed in the country they live. So these trusts aren’t required to pay tax in New Zealand. However, some other countries charge income tax on a different basis. They consider a New Zealand trust to be a New Zealand tax concern. These trusts aren’t being taxed and nor are the people living outside New Zealand. See the problem?
Closing the loophole...
It was never intended that New Zealand should become a tax haven, but evidently some people have made use of this loophole.
For many years there has been no need to file a tax return for your trust if none of the settlors was a resident in New Zealand since the time when the trust was first set up. The trust’s income was all earned overseas and was paid to overseas beneficiaries.
Our tax system is based on the assumption that we tax income earned or received in New Zealand. If the settlors always lived overseas and the income is earned overseas and paid to beneficiaries who live overseas, then there is no reason to tax that income in this country. The foreign tax regime was designed to avoid the Inland Revenue having to waste time checking returns for trusts where there is no tax to pay.
Traditionally, only English speaking countries had laws which allowed the establishment of trusts. For example, people in Europe and South America who wanted to set up a trust had to use the laws of another country in order to create their trust. In many countries you have to leave most of your estate to certain specified family members irrespective of your wishes in your will. Putting assets into a trust in another country was a way of getting around this. New Zealand seemed like a safe place where trusts would be enforced by our courts which are not as slow or expensive as some countries.
The Panama Papers
Foreign trusts made the news recently because someone hacked into the records of a law firm in Panama. It seems there were some dodgy dealings going on. Apparently criminals and crooked politicians in other countries were hiding money in companies and other structures. Unfortunately this Panamanian law firm was also setting up trusts under New Zealand law for the benefit of some of their clients. We now know foreign trusts are no longer just a way to protect property.
What are the risks for New Zealand?
Most importantly, these revelations clearly pose a risk to New Zealand’s reputation as a good place to do business. We don’t want to be seen as a place where people can hide illegally acquired funds or avoid their obligations. The government came under some pressure to deal with the problem and tax expert John Shewan was asked to provide a report.
Mr Shewan’s recommendations have been accepted and the government has now introduced legislation which is expected to be passed by the end of the year.
The main new requirement is for foreign trusts to be registered. The registration forms must name the settlor, the people who have control, who has power to appoint and remove trustees or make other changes, and the trustees. Each person will also have to provide an email address, residential address and tax number for their country of residence. Some beneficiary details will also need to be provided. Annual returns will be required to update this information and will have to include financial statements for the trust and details of distributions.
The new legislation will not require Inland Revenue to send this information automatically to all other countries, but it will be available on enquiry from overseas authorities.
Beyond protecting our reputation, these new rules are unlikely to affect most New Zealanders. If you’re living in New Zealand and receive distributions from a trust, you must pay the tax on income you receive unless the trustees have already paid it. New Zealand trustees must either declare the income as trustees’ or beneficiary income. This has not changed and will not be affected by the new rules.
As always, if you have any queries about a trust matter, talk to a trust lawyer as soon as you can.