New Zealand Offshore Trusts
Exemption of Taxation for overseas income of New Zealand Foreign Trusts
New Zealand provides an ideal asset protection regime for high net worth offshore persons.
New Zealand non-residents are only subject to income tax on income with a New Zealand source.
The tax residency of the trustees is not relevant to determine the trusts status as a New Zealand foreign trust.
However to establish a nexus with New Zealand and to ensure New Zealand law can legitimately be used as the jurisdiction of the trust, the trustee or the majority of the trustees are normally New Zealand residents.
A trustee is liable for New Zealand income tax on income derived from New Zealand, irrespective of where the trustee lives. The trustee is also liable for New Zealand income tax on income derived from outside New Zealand where:
any settlor is resident in New Zealand at any time during the income year,
any settlor of an inter vivos or a testamentary trust died while they were resident in New Zealand, and a trustee is resident in New Zealand at any time during the income year.
Exceptions to the general rule
There are two situations in which a trustee is not liable for income tax on trustee income derived from outside New Zealand. These apply where the settlor is resident outside New Zealand at all times during the income year and either:
no settlement has been made on the trust since 17 December 1987, or the only settlements made on the trust were by settlors who were not resident in New Zealand at the time of settlement and who have not been residents in New Zealand since 17 December 1987.
Accordingly when a non resident Settlor establishes a trust with a New Zealand resident trustee which does not derive New Zealand sourced income, that trust, its trustees, and the non-resident beneficiaries are not liable for New Zealand taxation so long as there is a qualifying resident foreign trustee.
Resident foreign trustees (including qualifying resident foreign trustees) are required to complete a disclosure form and file it with Inland Revenue for each foreign trust they administer.
A qualifying resident foreign trustee is:
1. an individual who is a member of an approved organisation, or
2. an entity that has a director or other individual who is resident in New Zealand and is a member of an approved organisation who is in a position allowing significant influence over the management or administration of the trustee.
Organisations that have been granted approved organisation status are:
1. New Zealand Institute of Chartered Accountants
2. New Zealand Law Society
3. The Society of Trust and Estate Practitioners (New Zealand Branch)
Full details of these new rules are in the Tax Information Bulletin Vol 18, No 5 (June 2006).
No Government registration of the Offshore Trust is required.
The relevant provisions in the New Zealand Income Tax Act 2007 are as follows:
A trust settled by a non-New Zealand resident settlor with a New Zealand resident trustee (a New Zealand offshore trust) is a "foreign trust" under Section HC 11 of the Act which provides that:
A trust is a foreign trust in relation to a distribution if no settlor is resident in New Zealand at any time in the period that
(a) Starts on the later of 17 December 1987 and the date on which a settlement was first made on the trust; and
(b) Ends on the date of distribution.
Accordingly 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.
A Foreign Trust is not specifically deemed to be non resident in the legislation. The Income Tax Act 2007 does not define the residence of a trust. The taxation status of the New Zealand offshore trust is wholly determined by the residence of the settlor.
Taxation of Non Resident Beneficiaries of New Zealand Trusts
If a beneficiary who receives a taxable distribution from a foreign trust is a New Zealand resident, the taxable distribution must be included in the beneficiary's tax return as part of their assessable income (this is on top of any beneficiary income the beneficiary receives from the trust). The beneficiary will then pay tax on the taxable distribution at their normal income tax rates.
If the beneficiary receiving the taxable distribution from a foreign trust is not a New Zealand resident, they will only have to pay New Zealand income tax on any part of the taxable distribution that came from a source in New Zealand.
The trust must deduct New Zealand non-resident withholding tax from any New Zealand sourced interest, dividends or royalties before the non-resident beneficiary receives them, and this withholding tax is the final New Zealand taxation payable on the income.
The non-resident beneficiary may be able to claim a credit for this New Zealand tax paid in their overseas tax return. Other New Zealand sourced income, such as income from a rental property, will be subject to New Zealand income tax at the normal rates.
New Zealand Foreign Trusts are exempt from many of the legislative requirements of offshore jurisdictions
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