New Zealand Foreign Trusts – Opportunities for Offshore Investors
Overview: Popularity of Trusts in New Zealand
Trusts are a well recognised and accepted part of the New Zealand legal and economic landscape. They are in wide use and application primarily as vehicles for asset protection. This popularity extends to both domestic and off-shore usage.
There is an increasing acknowledgment of New Zealand as a safe and reliable location for an offshore trust. The reasons behind this include New Zealand being internationally acknowledged as having a good reputation and standing as an OECD member. The advantages which are presented by a New Zealand offshore trust have been a part of the New Zealand legal framework and are the result of the government’s deliberate policy choice rather than a loophole.
The State of Trust Law: Legislation and Case Law
New Zealand is a Commonwealth country and a member of many international treaties. A correctly structured New Zealand offshore trust may be able to take advantage these treaties and numerous Double Tax Agreements. By establishing a New Zealand offshore trust the trust will also have trans-national effect and recognition in countries which have common law heritage.
New Zealand’s trust law is well established from a mix of both statute and case law which has its foundations in the common law. These principles are clearly understood and readily applied by the Court when required giving the law the required degree of stability and certainty. However with laws constantly developing and changes in personal circumstances to be considered, trust law in New Zealand is also regarded as being both modern and flexible which allows for these issues to be taken into account should the need arise.
The Advantages of a New Zealand Foreign Trust
There are many advantages to establishing a New Zealand based trust. Trust law in New Zealand allows for wide discretionary powers for trustees including the power to add and remove trustees and beneficiaries, vary the trust deed and, due to its discretionary nature, the ability to choose how and when to make distributions to the beneficiaries while still providing substantial protection for the beneficiaries’ rights. This makes for a very controlled but flexible succession and estate planning option.
New Zealand is not seen as a “tax haven” country so the use of a New Zealand trust is generally not perceived as a means to avoid tax or as being tax aggressive.
New Zealand’s foreign trust regime enables a person who is not a tax resident in New Zealand to establish a New Zealand trust with a New Zealand resident trustee and for that trust to hold offshore assets and to derive income from outside New Zealand but have no New Zealand income tax liability.
The income tax liability of a trust in New Zealand is determined by whether or not a settlor is or has ever been a tax resident in New Zealand. New Zealand income tax legislation provides that foreign sourced income derived by a New Zealand resident trustee is exempt income if the settlor of the trust is not resident in New Zealand. Accordingly, a New Zealand established trust with a New Zealand trustee but no New Zealand resident settlor and no New Zealand sourced income will have no New Zealand income tax liability.
A New Zealand foreign trust can hold offshore property and derive offshore income. Provided that no income has been sourced in New Zealand, a trust has no New Zealand tax obligations and is not required to file an annual income tax return in New Zealand.
A trust would need to have a New Zealand resident trustee. Ideally, the New Zealand trustee would be a New Zealand incorporated company used for this purpose. With regard to compliance issues, such a corporate trustee would need to comply with the usual filing requirements of the Companies Office in New Zealand. There is a disclosure form required by the Inland Revenue Department but it is relatively straightforward and is predominantly to satisfy Australian Tax Authorities that the settlor is not an Australian tax resident. It is a one-off filing requirement unless there is a change in the information disclosed.
The New Zealand situation is rather different in that it taxes a trust by reference to the residence of the settlor rather than the trustee. Therefore, any income tax liability of the New Zealand foreign trust would arise in the country in which the income is sourced. If the source of income is in a country with which New Zealand has a Double Tax Agreement, it could possibly be subject to a concessionary agreement which recognises the trust by reference to the trustee rather than the settlor. In any event, it would be prudent for the settlor of a New Zealand foreign trust to check the impact of the domestic tax laws of the country in which the settlor is tax resident.