Foreign Trusts
New Zealand taxes trusts on a settlor basis. One result of this is an exemption for foreign-sourced amounts derived by trustees resident in New Zealand if the trust is classified as a foreign trust.
Foreign trust is a trust with none of its settlors have been resident in New Zealand since the later of these dates:
• 17 December 1987
• the date the trust was first settled
A trust will cease to be a foreign trust if it makes any distribution after a settlor becomes a New Zealand resident, or if a New Zealand resident makes a settlement on the trust.
Definition of a Foreign Trust Extended
The extension to definition of foreign trust and inquiry into foreign trust disclosures rules were due to Government’s April 2016 Inquiry into Foreign Trust Disclosure Rules.
The inquiry was set up to ensure the foreign trusts are not being used as a tax heaven. And to restore and protect its international reputation a formal registration process for foreign trusts and increased disclosures of information was made mandatory.
This also led to sharing of information with the Department of Internal Affairs and New Zealand Police. These changes were important to protect NZ reputation at a global stage. The Finance and Expenditure Committee also recommended that Inland Revenue should be able to share information with the Overseas Investment Office. This will take the form of an Approved Information Sharing Agreement between Inland Revenue and the Overseas Investment Office.
These disclosure requirements are imposed on a New Zealand resident trustee of the foreign trust.
An amendment has been made to section HC 11 in the Income Tax Act 2007 which classifies when a trust is a foreign trust. This section has been amended to apply at a moment in time rather than in relation to a distribution. This ensures that it is not necessary for a foreign trust to have made a distribution before the disclosure obligations apply.
Tax Exemption for a Foreign Trust
Eligibility for tax exemption Foreign-sourced income derived by a New Zealand-resident trustee is exempt income under section CW 54 of the Income Tax Act 2007 if certain criteria are met. The criteria are set out in section HC 26 ITA 2007. The amendments to section HC 26 ensure that the foreign trust must comply with the increased disclosure obligations in order to be eligible for this tax exemption.
Time limits for Application for Registration of a Foreign Trust
When All trustees are natural persons not in the business of providing trustee services.
The trustee must apply to register the trust within four years and 30 days from the date that the trustee became a resident foreign trustee (that is, when the trustee was appointed or became a New Zealand resident). If the resident foreign trustee has held that role for more than four years and 30 days before enactment of the legislation, the deadline is 30 June 2017. If there are multiple resident foreign trustees, the grace period begins on the earliest date that any of the trustees became a resident foreign trustee.
Registration of a Foreign Trust
Resident foreign trustees will be required to register foreign trusts with Inland Revenue under new section 59B(2) TAA 1994. A contact trustee is responsible for the communication with the Commissioner of Inland Revenue and must provide the required information about the foreign trust.
Disclosure of a Foreign Trust
Disclosure includes registering the trust, disclosing information required as part of registration, filing annual disclosure returns and paying fees.
Annual Disclosure Returns
Resident trustees of a foreign trust will be required to file annual returns, including the trust’s financial statements, and details of settlements and distributions made over the year. The due date for filing the return is six months after the foreign trust’s balance date, or 30 September if the trust does not have a balance date (being six months after the end of New Zealand’s tax year). The contact trustee must also provide any updates to the information provided at registration within 30 days after becoming aware of the alteration.