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Trusts are a popular method of protecting assets in New Zealand. Family trusts are among the most common kinds, but they are not the only possible option. If you hold all of your trust assets offshore, this is a foreign trust. To be valid in New Zealand, it must have a trustee who lives here. New Zealand Foreign Trusts (NZFTs) can be eligible for a tax exemption on the income they generate. In response to the Panama Papers leaks in 2017, the government introduced additional disclosure requirements for NZFTs to qualify for this tax exemption. This article will explain how foreign trusts operate and what these disclosure requirements involve.

How Do Foreign Trusts Work?

There are three key parties in a trust’s framework. These are the:

  • settlor(s);
  • trustee(s); and
  • beneficiaries.

The settlor puts their assets into a trust for the trustee to manage and maintain for the beneficiaries’ benefit. Foreign trusts operate in the same way. But, there are a couple of differences. These are:

  • the settlor must have never lived in New Zealand; and
  • all trust income comes from offshore assets. You do not generate it in NZ.

A foreign trust can operate in NZ if one (or more) of its trustees is a resident here, known as the resident foreign trustee.

How Are Foreign Trusts Taxed in NZ?

Usually, overseas income is taxed for NZ residents. But if you generate income overseas from offshore trust property, your NZFT can qualify for a tax exemption on beneficiary income. It must, however, meet the current disclosure requirements. The amount of tax that the trust income is subject to is according to the tax laws of the settlor’s country of residence.

For example, a settlor could set up a trust in Australia, their home country, that holds rental properties in the United States. They could choose an NZ resident trustee to manage the trust assets. Australian law would govern the trust’s taxes, and trustees would not have to pay NZ taxes.

If the settlor moves to NZ (or one of them, if there are multiple), this trust does not qualify to be a foreign trust. Trustees must register this change to a complying trust within 12 months and register under the NZ tax scheme. If not, the trust is non-complying and will have a higher tax rate. 

Disclosure Requirements

To qualify for a tax exemption on income for your NZFT, trustees must comply with the reformed disclosure requirements. Once you create a foreign trust or choose an NZ resident trustee, trustees must register the trust with Inland Revenue and submit the required information within 30 days. You may have a longer grace period if all of your trustees are: 

  • natural people (i.e. not companies); and
  • not professional trustees.  

When you register your NZFT with Inland Revenue, you have to provide various documents about your foreign trust. These include:

  • a copy of the trust deed;
  • identifying information and contact details for all settlors, trustees, and beneficiaries, as well as any other people important to the trust (such as appointers);
  • information about all trust settlements that have happened from the trust’s creation until your registration application; and
  • a written confirmation that all trust parties understand the relevant tax and anti-money laundering laws in NZ.

Ongoing Disclosure Requirements

In addition to the initial registration, the ongoing disclosure requirements include:

A Contact Trustee

You must choose one resident trustee to be a contact trustee. They are in charge of communicating with Inland Revenue and ensuring the trust complies with its contract requirements.

Annual Returns

Each year, trustees must file a return with Inland Revenue within six months of the trust’s balance date (or else, 30 September). This must contain financial statements and information about trust settlements or distributions made within that year.

Fees

There is an initial registration fee of $270 for an NZFT and an annual filing fee of $50. This is waived for foreign trusts where all trustees are individuals and are not professional trustees.

Before the 2017 law reforms, the information that trustees had to give the government about foreign trusts was very basic. If the trustees of your NZFT do not comply with these disclosure requirements, then the tax exemption does not apply. Trustees will be liable for taxes on the trust’s worldwide income. From March 2021, trustees can file their annual returns online.

Key Takeaways

As part of a global push for greater tax transparency after the Panama Papers leaks, the NZ government introduced new laws around New Zealand Foreign Trusts’ disclosure requirements. Trustees now have to file annual returns and contact Inland Revenue about the trust’s functioning. Otherwise, the foreign trust does not qualify for a tax exemption on its income. If you would like more information or help with the disclosure requirements for your foreign trust, contact LegalVision’s New Zealand trust lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a trust?

A trust is a legal contract where someone (the settlor) gives their assets to another person (the trustee) to manage and maintain for someone else (the beneficiary). A trust lasts for 125 years, or when the trust deed says it finishes.

What is a foreign trust?

A foreign trust is a kind of trust where the settlor lives in a different country, and all of the trust property is held offshore. No income is generated in NZ. But, there is at least one trustee that lives here.

Are distributions from foreign trusts taxable?

A New Zealand foreign trust’s distributions are taxed according to the settlor’s country of residence. If the trustees comply with the law’s disclosure requirements for foreign trusts, they are eligible for a tax exemption.

What do I have to tell IRD about my foreign trust?

Trustees need to provide IRD with copies of the trust deed, contact information of its key parties, and records of trust settlements and financial returns. They also complete annual returns.

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