Geoffrey Clews, Barrister
1.1 A trust which pays no New Zealand income tax may be established under New Zealand law and under the trusteeship of a New Zealand resident trustee. The trust must have no income from a source in New Zealand, must not have assets that are sold or disposed of in New Zealand so as to give rise to income subject to taxation in this country, and must not have any beneficiaries or potential beneficiaries who are resident for tax purposes in this country.
2. Relevant Trust Tax Regime
2.1 This position is achieved as the result of the following features of New Zealand tax law. Generally speaking, income is recognised as being either trustee income or beneficiary income for the purposes of the trust tax regime. However, a New Zealand resident trustee may derive “foreign sourced income” without that income being treated as gross income of the trustee. Gross income is that from which a taxable net sum may be calculated.
2.2 The exemption requires that no settlor of the trust be resident in New Zealand at any time in the relevant income year. The trust in question must also be neither a superannuation fund registered under the Superannuation Schemes Act, nor a testamentary or inter vivos trust of which any settlor died while resident in New Zealand, whether in the relevant income year or otherwise.
2.3 “Settlor” is widely defined to mean, essentially, any person who in any way, directly or through a series of trusts, provides goods and/or services to a trust at less than the market value of those goods and/or services.
2.4 The non-existence of any New Zealand resident settlor prevents the application of the settlor liability regime under the Income Tax Act. That normally makes a New Zealand resident settlor of a trust (wherever established) liable for the trustee’s world wide income unless the trustee has elected to accept liability directly. The benefit of the exemption and the non-application of the settlor liability rule is that non-New Zealand sourced income simply falls outside the concept of trustee income for New Zealand tax purposes.
2.5 Trustee income does not include “beneficiary” income which is essentially that income derived by a trustee which is distributed to a beneficiary in the income year in question or within six months thereafter, or which vests in interest in the beneficiary during the income year. In addition to beneficiary income, beneficiaries of a trust may also be taxed on so-called “taxable distributions” from trusts. It is necessary to consider both of these in so far as they may attract a New Zealand tax liability.
2.6 Beneficiary income is defined in the Income Tax Act to include a foreign sourced amount derived by a trustee that would have been the trustee’s gross income had the tax exemption not applied, where that income vests absolutely in interest in the beneficiary or is paid or applied by the trustee to or for the benefit of the beneficiary during or within six months after the end of the income year. This means that ordinarily, income that would not be taxable to the trustee may still be taxed to the beneficiary if it vests during the income year or is paid or applied to the beneficiary within the period referred to in the relevant definition.
2.7 However, if a beneficiary is not himself resident for tax purposes in New Zealand, the Income Tax Act can only apply to the extent that the relevant income has an actual or deemed source in New Zealand and no overriding tax treaty abrogates New Zealand’s right to tax.
2.8 The Income Tax Act provides that certain income is deemed to be derived from New Zealand. This includes income derived by a beneficiary under any trust, so far as the income of the trust fund is derived from New Zealand. Accordingly, if the trust’s income is only foreign sourced income there is no deemed source of income in this country when a beneficiary receives that income from the trust. There is also a strong inference that income other than the class to which it refers is not sourced here in any other case, ie that there is no actual as opposed to deemed source that needs to be considered.
2.9 As noted above, a taxable distribution may also comprise income assessable to a beneficiary. The words “taxable distribution” mean any distribution that is not beneficiary income but is also not a distribution of the corpus of a trust or, in the case of a foreign trust, certain capital gains. The relevant section includes taxable distributions that may comprise gross income of a trust beneficiary. The terms of the paragraph make it clear, however, that if no income of the trust fund is derived from New Zealand, then no part of a taxable distribution derived by the beneficiary will be regarded as having a source in this country. Thus if the beneficiary is resident elsewhere, no New Zealand tax arises.
3. Applicability of Double Tax Agreements
3.1 One element of New Zealand’s trust taxation regime is less certain. That is the applicability of New Zealand double tax agreements to trusts established in this country, which enjoy the benefits of the tax exemption described above. There are different views on this issue. The possibility of accessing New Zealand’s network of double tax agreements is sometimes a factor in considering the use of the regime referred to above.
3.2 In most instances double tax agreements apply as between persons who are residents of one or both of the contracting states. Where the concept of residence is defined for the purposes of the relevant double tax agreement by reference to domestic law, the New Zealand resident trustee of a trust established under the regime referred to above will, on the face of it, be a person to whom a double tax agreement may apply. Where, however, residence is defined for the purposes of the double tax agreement by reference to a person’s “liability to tax” under the laws of the contracting state, the position is more problematic.
3.3 The intent and application of the trust regime referred to above is that a trustee should not be liable to tax by reason of residence where the other criteria referred to have been satisfied. Moreover, there are some double tax agreements that define residence so as to exclude a person who is liable to tax in New Zealand in respect only of income from sources in this country. A trustee to whom the regime referred to above applies is clearly still liable for New Zealand sourced income but on that basis is arguably excluded from qualifying New Zealand residence for the purposes of such double tax agreements.
3.4 It appears that there is no automatic entitlement to access New Zealand’s double tax agreements. The extent to which any of them may be applicable to a New Zealand resident trustee who pays no tax in this country will depend on the type of analysis summarised in the preceding paragraphs.
4. Treatment of Attributed Foreign Income
4.1 New Zealand has a well-developed international tax regime which attributes to a New Zealand resident shareholder the overseas income derived by controlled foreign corporations and foreign investment funds (as defined for the purposes of the regime). Where a New Zealand resident trustee holds offshore assets through the intermediary of a controlled foreign company, there is a question as to whether that company’s income is attributed to the New Zealand resident trustee.
4.2 Although there is no express exemption, it is generally accepted that attributed foreign income from a controlled foreign company or foreign investment fund falls within the scope of “foreign sourced income” for the purposes of the trust regime. The issue is not entirely without doubt, however. That is because attributed income has no source (foreign or domestic) to speak of. It is a statutory construct only and on that basis may be seen as outside the words. Nevertheless, the underlying income of the overseas entity that is attributed is foreign sourced. On that basis it is generally accepted that the attribution rules ought not to apply to translate the income of such a company or fund into a taxable sum in the hands of the New Zealand resident trustee.
5. NZ Revenue Access to Information and information sharing
5.1 In response to pressure from Australia, especially, the law relating to the information exempt trusts must retain in this country is being changed with effect form 1 April 2006. Moreover a requirement is being introduced that the New Zealand resident trustee(s) of such a trust must be approved persons (at the moment approval will extend to lawyers and accountants).
5.2 If the law is passed as proposed, the New Zealand resident trustee will be required to keep the trust deed, particulars of settlements and distributions including the names and addresses of settlors and beneficiaries, a record of assets and liabilities, receipts and expenditure and details of the accounting system used to record the information.
5.3 A resident trustee will be required on request from the New Zealand Inland Revenue to disclose particulars of the trust, including the contact details of all resident trustees. The trustee must be a member of an approved organisation such as the New Zealand Law Society, the Institute of Chartered Accountants or some other such organisation approved by the IRD whose members are subject to a code of conduct and disciplinary procedures. Under the proposed legislation, if a resident trustee is not a member of an approved organisation the trust will be subject to tax in New Zealand on its worldwide income.
5.4 Where the settlor of a trust is an Australian resident an automatic request for information is proposed. The information about such a trust will routinely be provided by the IRD to the Australian Tax Office. Information may be provided to other treaty partners upon request on a case by case basis.
This abstract should not be relied upon as legal advice. It is intended as a commentary in summary form only and to be generally descriptive of the law it covers. No responsibility or liability is accepted for the content of this abstract or for loss or damage that may be occasioned by applying it, or otherwise relying upon it, contrary to this warning.
© G D Clews, 2005