TBA & Associates

New Zealand Trusts

Foreign trusts in New Zealand

The nature of New Zealand trust legislation creates an attractive environment for non-resident private investors to use New Zealand trusts to hold international investments and private assets. The New Zealand trust provides non-resident investors with a globally recognised structure for the tax effective preservation of private wealth:

  • New Zealand Anti-Money Laundering Legislation
  • New Zealand Trust Legislation
  • New Zealand Trading Trusts
  • New Zealand Tax System

New Zealand is a high tax jurisdiction with a tax system primarily comprising an income tax and a 12.5% goods and services tax, each levied only on New Zealand residents or from income derived within New Zealand. The tax legislation includes strong anti-avoidance provisions and highly effective controlled foreign corporation (CFC) legislation. New Zealand does not have capital gains tax nor any other form of wealth tax.

The New Zealand tax system does not tax non-residents on foreign source income. Various legislative provisions ensure that this principle is applied.

In 1988 reform of the tax system gave legal recognition to the tax exempt status of the foreign trust in respect of income derived from sources outside of New Zealand.

New Zealand has a broad network of double tax agreements with more than 30 countries (including Australia, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Switzerland, the United Kingdom and the USA).

There are not expected to be any changes to tax laws that would diminish the attraction of New Zealand as a base for global investment.

New Zealand anti-money laundering legislation

New Zealand became a member of the Financial Action Tax Force (FATF) in response to concerns that New Zealand could be exposed to money laundering for international criminal activities.

In 2009 the Anti-Money Laundering and Countering Financing of Terrorism Act was passed. It will come into full force and effect from June 2013. This legislation places obligations on financial institutions to detect and deter money laundering and terrorism financing. The Act imposes significant obligations on financial institutions with severe penal and financial consequences for breaches of the legislation.

This new legislation was enacted in order to benchmark the previous legislation to current international standards.

New Zealand trust legislation

The nature of New Zealand trust legislation creates an attractive environment for non-resident private investors to use New Zealand trusts to hold international investments and private assets. The New Zealand trust provides non-resident investors with a globally recognised structure for the tax effective preservation of private wealth.

Trust law

New Zealand trust law is derived from its statutes and from English common law and equity. Consequently, there is explicit recognition of the trust concept, i.e. differentiation between the beneficial and legal ownership of property.

The principal statute is the Trustee Act 1956 as amended. The Act incorporates some unique features of trust law and in particular the distinction between a managing trustee and a custodian trustee. The legislation provides for an 80 year perpetuity period plus a 21 year “wait and see” rule.

Foreign trust tax exemptions

The foreign trust is one of three types of trust codified in the New Zealand tax legislation. A trust settled under New Zealand law by a settlor (grantor) who is not resident in New Zealand is a foreign trust even if the trustee is resident in New Zealand. Under specific provisions of the New Zealand tax law such a foreign trust is only taxable on income derived in New Zealand. This is unique in that most other jurisdictions determine the tax residency of a trust on the basis of the domicile of the trustee.

The tax status of the New Zealand foreign trust is wholly determined by the residence of the trust settlor. As noted above, the New Zealand foreign trust is exempt from New Zealand tax on income derived from sources outside New Zealand. This exemption applies to the trustee, the non-resident settlor, and the non-resident beneficiaries of the trust. Under New Zealand law the trust itself is not a taxable entity.

Provided the settlor is not an Australian resident there are minimal disclosure requirements for New Zealand foreign trusts. The trustee is only required to advise the New Zealand tax authorities of the name of the trust (or some other identifying feature) and the details of the New Zealand trustee. No disclosure obligations arise in respect of the trust property and trust income, other than income derived from sources in New Zealand.

New Zealand trading trusts

In addition to its use for private client wealth preservation the New Zealand foreign trust can also be used as a tax effective vehicle for international trading and commercial activities.

A trading trust is a trust where the trustee uses the trust property to conduct a business or commercial enterprise. The law assumes that the trust does not trade as it is not in itself a legal entity – it is the trustee who is conducting the trading activities.

The profits derived from those trading activities accrue as income of the trust and, subject to the provisions of the trust deed, are available for distribution to the beneficiaries of the trust. The trustee has no right personally to the profits derived from the trading activities, as the income has been derived from the use of trust property.

A New Zealand foreign trust that operates as a trading trust is of course only liable to New Zealand income tax on income derived from a source in New Zealand. Consequently, care needs to be taken to ensure that the income arising from the international trading activities is not considered to be New Zealand sourced income.

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