LEGISLATION CHANGES TO
NEW ZEALAND FOREIGN TRUSTS
APPLICABLE FROM 1ST OCTOBER 2006
The new legislation recently passed, requires from 1st October 2006, either a New Zealand resident unqualified director, or a professional "qualifying" (chartered accountant or lawyer), as either a manager, or a director of a trustee company, for a New Zealand Foreign Trust. If the former (unqualified director) is utilized, then should there be any omissions including any non compliance with the new legislation by the corporate trustee, then, until the omission is rectified, the trust could be taxable on its world wide income. If this liability arises, and if subsequently a trustee does provide the outstanding records, the liability for tax on worldwide income will cease retrospectively.
The other option is to select as the N.Z. resident manager, or as a director, "a qualifying N.Z. resident trustee" being a professional (chartered accountant or lawyer), being the "safe harbour", which will result in the trust NOT being at risk of taxation on its World wide income in the event of any omissions or non compliance.
Instead the matter would be dealt with by the disciplinary committee of the professional's Accountants or Law Society, and punishment for this "qualifying" person will be a fine and or imprisonment. Our company can provide the necessary individuals. However with the qualifying trustee option, our nominated person will only consider the “manager” role which should reduce his potential risk exposure, compared with acting as a disclosed director. This “manager” role facilitates all legislative requirements.
In addition to the New Zealand director (or manager) requirement, we advise clients to maintain the majority of directors offshore in a non taxed (offshore) jurisdiction, such as Seychelles, Belize or Saint Vincent & The Grenadines, to ensure the majority of “mind and management” is offshore, with the result the trust cannot come within the New Zealand tax net.
Under the new legislation, it will be necessary for our firm to advise our Revenue of the existence of a New Zealand Foreign Trust, the name or other identifying particulars of the trust, names and other contact details of N.Z. trustees, names of any N.Z. trustees who are members of an approved organization. No other information is required (except in the situation where the Settlor is an Australian resident, where that fact has to be disclosed). There will be additional minimum records to be held in N.Z. by the N.Z. manager or director, such as a copy of the trust deed, details of settlements made to and distributions made by the trust including names and addresses of the Settlors and beneficiaries, a record of the assets and liabilities and all sums of money received and spent by the trust, and if the trust carries on business, the charts and codes of accounts, the accounting instruction manuals and the system and program documentation describing the accounting system. This information is not provided to our Revenue, but would have to be disclosed only following a specific request from an offshore Government with whom New Zealand has a double tax treaty, under the sharing of information agreements by these treaty countries. These provisions result from the Australian Tax Office requests to the N.Z. Government and are to primarily target Australian resident Settlors. For practical purposes there is little expectation of active information exchange in respect of individuals resident in jurisdictions other than Australia.
Specific legislation can be searched via the internet (www.legislation.co.nz)
Conclusion – these changes have been received positively, as the level of compliance or disclosure is not onerous, but the recognition, confirmation, and support by our Government of the New Zealand Foreign Trust industry is most encouraging. We welcome inquiries and will be happy to provide more in depth information, including legislation references.
WHAT IS A NEW ZEALAND FOREIGN TRUST?
The New Zealand Foreign Trust is an international tax planning vehicle which requires a New Zealand resident Trustee. If effective management is also New Zealand resident then the trust may claim the benefit of New Zealand's tax treaty network.
It offers zero base taxation, complete freedom of financial transaction from a jurisdiction with robust statutory and sovereign protection, free from stigma or prejudice.
A New Zealand Foreign Trust effectively managed in New Zealand by a New Zealand Trustee is exempt from New Zealand Income Tax.
A New Zealand Foreign Trust may be utilized as a stand-alone entity or in conjunction with International Double Tax Agreements.
There is no need for a trust to be registered to be recognised and of binding effect in New Zealand.
The New Zealand Foreign Trust has been a part of New Zealand’s legislative framework since 16 December 1988 and results from a deliberate policy of the New Zealand Government.
The New Zealand Foreign Trust offers non-residents of New Zealand all the advantages of a conventional tax-free structure within a well-regulated jurisdiction.
If a New Zealand Trust, operated by a New Zealand resident trustee, receives income from any place other than New Zealand that income is tax free in New Zealand.
If the funds are invested outside of New Zealand no tax is payable on that income in New Zealand.
There is no capital gains tax in New Zealand. Any capital increase in the value of the trusts’ assets is therefore not taxable.
Beneficiaries who have no New Zealand income pay no tax on New Zealand.
A New Zealand Foreign Trust has trans-national effect. It is recognised by the Hague Convention on the recognition of Trusts. It has recognition in every English Common Law Country, and all Double Tax Agreements. A Trust may be migrated from one jurisdiction to another, and so may a beneficiary. To obtain these advantages a Trust Deed must be carefully drawn.
DOUBLE TAX AGREEMENT UTILIZATION
While a New Zealand Foreign Trust may be used as a zero tax vehicle on its own it is also compatible with New Zealand’s International Double Tax Agreements.
In general New Zealand’s Double Tax Agreements treat a New Zealand Foreign Trust as a New Zealand resident. Therefore a New Zealand Foreign Trust can utilise the benefits of certain Double Tax Agreements.
The practical effects of utilization of Double Tax Agreements are:
1. A withholding tax is payable only to the country of origin on funds transferred,
2. Double Tax Agreement use lends a level of simplicity.
IMPORTANT FACTORS FOR FOREIGN QUALIFICATION
New Zealand Tax Treaties follow the standard OECD model, with certain specific derogations.
In general, the New Zealand rules differ from that of the OECD model in that the place of effective management of an enterprise is not always where overriding control is exercised, but where practical day-to-day management occurs. This has important consequences for the New Zealand Foreign Trust, as the trustee must not only be a New Zealand resident but must effectively carry out its functions in New Zealand. That is achieved not only by the Trustee being resident in New Zealand, but also by reason of the trust being effectively managed in New Zealand by its resident director.
The recognition of a Trustee Company as the "Beneficial Owner" of income by the "source" state and the applicability of the Double Tax Treaty to the withholding of tax in that other state payable to a New Zealand trustee company are matters of the application of treaty law in the source state and not matters of the law of New Zealand.
WHY IS THE NZ FOREIGN TRUST USEFUL?
THE NZ FOREIGN TRUST CAN BE FORMED QUICKLY AND CHEAPLY
- It is possible to form a zero tax Private Trust Company of your own.
- The company needs a NZ registered office.
- There is no need for an NZ resident company secretary although this would be advisable.
- A single director can reside outside NZ (corporate directors are not permitted).
- The shareholder may be resident anywhere.
- The Private Trustee Company will be NZ resident due to the fact of its place of registration in New Zealand.
- A Private Trust Company operated by Our Firm will not require a licence.
- If there is no double tax agreement; the absence of a mutual information exchange procedure by the home government authorities may be useful.
- There are no Double Tax Agreements between New Zealand and South American countries, Hong Kong, Greece, Spain and certain other states.
THE BENEFITS OF A DOUBLE TAX AGREEMENT
- For example property in France is taxable. The NZ - France Double Tax Agreement may be used to eliminate French property tax in certain circumstances.
- New Zealand has no Capital Gains Tax (although sometimes capital gains can be taxed as income) or Inheritance Tax.
- Certain planning techniques must be employed to give the particular provision of the Double Tax Agreement binding effect.
AVOID WITHHOLDING TAX
If income can be paid out under a treaty or otherwise to a NZ Foreign Trust owned bank account free from withholding tax in the place where the income is arising then, because the NZ Foreign Trust is not itself taxable in NZ, there will be no NZ withholding tax when the same income is paid onto the beneficiary.
UNDERLYING LEGAL SYSTEM FAVOURABLE
- Companies and individuals resident in New Zealand are not in general subject to Capital Gains Tax or Inheritance Tax.
- New Zealand, like the UK, does not oblige trusts to be registered or trustee companies to be licensed.
- The regulatory environment is less rigid than traditional offshore centres.
- The court system is fully developed.
LOW COST BASE
Our Firm can administer foreign trusts in NZ with a low cost basis due to the favourable rate of exchange of the New Zealand dollar. If trust management is to take place in a jurisdiction outside New Zealand the above benefits of the NZ Foreign Trust regime will be available, however in general, to have the benefits of Double Tax Treaties, "practical management" should take place in NZ.
USES OF PRIVATE TRUSTS
The majority of people prefer to decide for themselves how their assets will be disposed of when they die. This is usually made in the form of a Last Will and Testament. A trust allows more flexibility than a will and as such is an ideal medium for Estate Planning. This is achieved by appointing Trustees with powers stipulated in the deed of trust. In addition, for residents of certain countries, a Trust can be a useful vehicle for avoiding problems such as forced heirship.
One of the advantages of a Trust is that it may be used as a means of mitigating or eliminating certain types of income, capital gains and inheritance taxes. A trust is a very personal matter and legal advice should be sought in relation to the Settlors and beneficiaries personal circumstances. It is imperative that the Trust Deed is drafted carefully.
AVOIDING DISRUPTION ON DEATH
A death can cause financial disruption, particularly if the death is sudden and unexpected. Probate can often be costly and involve publicity and considerable delay. A Trust, created well in advance of death, with appropriate guidelines regarding the Settlor's wishes, can avoid these problems. When properly drafted, the trust can provide for the distribution of income and capital on the death of the Settlor, either at some designated date in the future, or at the perpetuity period of eighty years. The Settlor can provide a Memorandum of Wishes to the Trustees which, though not legally binding, can detail the desires of the Settlor in respect of payments of income and capital to the beneficiary or beneficiaries. It can also detail any other wishes and conditions. The Trustees, at their discretion, will consider the Memorandum of Wishes as the preference of the Settlor, but not as binding written instructions.
PROTECTION OF FAMILY MEMBERS
Trusts provide a useful mechanism for ensuring that the rights of the young and the infirm are catered for. For example, a Trust created for the benefit of disabled persons provides for their ultimate protection in later life, particularly if that person is an only child. It also ensures that surviving members of the family do not neglect that person's rights in the future.
PROTECTION FROM POTENTIAL CREDITORS
Trusts may be used to protect an individual from the claims of future creditors. For example "Asset Protection Trusts" have become popular within litigious societies, where professionals can often face costly lawsuits. By settling assets into a trust, potential damage from seizure is limited.
PRESERVING THE FAMILY FORTUNE
A Trust can also help to preserve a family fortune by preventing later generations from dissipating the capital assets. Most parents would ultimately want their offspring to benefit from their remaining assets. However, where parents feel that their children are not capable, or do not have the degree of responsibility required to manage large sums of money, Trustees can be appointed to manage and control the assets of the Settlor. This benefits the children and protects the family wealth for future generations.
CONTINUING THE FAMILY BUSINESS
A successful entrepreneur can ensure that the business he or she has built up continues for future generations by transferring a majority shareholding in that business to a Trust. This prevents the liquidation of the business by the descendants and the Trustees can offer professional guidance to members of the family in the continuation of the business.
An employer can set up a Trust for the benefit of employees (including directors), former employees, their spouses and dependents. These are often used for the provision of lump sum payments, discretionary and deferred discretionary bonuses and loans. These tax-efficient instruments are used to motivate employees.
We welcome inquiries and will be happy to provide more in depth information, including legislation references.
TYPES OF TRUSTS
The Holding Trust is one in which the Settlor, from the outset intends to place certain assets in the trust and ask the trustees to hold and protect them until the time when they need to be resettled or distributed. This is the most obvious choice of trust for management of the family wealth. The discretional deed of trust is designed to take into consideration all the succession alternatives but should be drafted carefully reflecting the Settlors particular wishes and the beneficiaries’ needs.
INTEREST IN POSSESSION TRUST
An Interest in Possession (IP) trust is one in which trust income must be paid to a particular beneficiary ("the life tenant").
This contrasts with the situation with a discretionary trust is one where trust income and capital may be paid to one or more of a class of beneficiaries, as the trustees think fit ("at their discretion"), without significant restriction.
Such a trust might be used simply because it is desired to pay all the income to the life tenant but a lifetime gift to an IP trust is a potentially exempt transfer so the gift will not give rise to UK Inheritance Tax (IHT) if the donor survives the gift by seven years. The property is treated as if it belonged to the life tenant and will be subject to tax on his or her death unless exempt or within the nil rate band.
ACTIVE INVESTMENT TRUST
This may be a "holding" entity but one in which the assets are intended to be reinvested and altered from time to time. As the care of the trustees and their professional advisors is required from time to time, Our Firm may need to deploy more of its resources to achieve the Settlors and beneficiaries objectives.
This is the ideal use of Our Firm being in New Zealand, a "white list" zero tax jurisdiction for the Settlor located outside New Zealand. Being a tax efficient structure particular care and skill is required to ensure that the investments of the trust remain efficiently invested. Such a structure might be used in combination with Private Investment Companies.