New Zealand Foreign Trusts

The New Zealand Foreign Trust is an entity which provides non-resident persons an opportunity to utilise the economic and political stability and trusted reputation of New Zealand as a base to manage their assets, without the imposition of New Zealand tax on non-New Zealand sourced income.

New Zealand’s trust taxation regime

In order to utilise the New Zealand Foreign Trust regime, no person who makes a settlement on the Trust (a "settlor") may be a New Zealand tax resident.  Under New Zealand tax law, a settlor includes any person who transfers value to the trust and also includes someone who provides financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred. 

Provided that the above settlor test is met, a New Zealand Foreign Trust may be established using a New Zealand resident trustee. 

Taxation of distributions

Foreign (non-New Zealand) sourced income will be exempt income for the New Zealand based trustee.  Distributions of income from the Foreign Trust will generally be taxable if received by New Zealand resident beneficiaries, except to the extent that they represent trust corpus or capital gains derived from transactions with third parties.  Distributions to non-residents will only be taxable to the extent they comprise New Zealand sourced income.  New Zealand sourced income needs to be carefully managed to ensure that there is no double tax imposed, once when the income is derived and later when that income is distributed.

The New Zealand Foreign Trust is usually established as a fully discretionary trust, allowing distributions of income and/or capital of the trust fund to any of the specified discretionary beneficiaries, which can include the settlor, allowing a level of continued control and access to the trust fund during the settlor's lifetime.  Powers of appointment and removal of trustees can be retained by the settlor or by a separate protector.

Minimal record-keeping and reporting requirements apply to New Zealand Foreign Trusts.  The New Zealand resident settlor is obliged to inform the Inland Revenue of the name of the trust, details for the trustee and whether there is an Australian resident settlor, but no details about the settlor or the beneficiaries need to be disclosed.  The Trustees are required to keep in New Zealand sufficient records in the English language to enable the ascertainment of the financial position of the Foreign Trust.  Failure to meet tax obligations can result in the worldwide income of the trust becoming subject to taxation in New Zealand.  A safe harbour provision against this risk applies if a New Zealand qualified professional trustee is appointed as trustee or director of a corporate trustee.

Summary

In summary, the key advantages of a New Zealand Foreign Trust include:

  • The Trust Deed can create a fully discretionary trust, with the ability to benefit the settlor and his or her family in any way deemed appropriate by the trustees, or can otherwise set the beneficiaries, and the proportion in which they will benefit;
  • Ability for the settlor to retain a degree of control over trust assets by:                
    • being appointed a trustee or co-director of the corporate trustee; and/or
    • retaining the power of appointment and removal of trustees during his or her lifetime;
  • Use of trustee located in a stable and respected jurisdiction;
  • No New Zealand taxation on non-New Zealand sourced income;
  • No New Zealand taxation on distributions of non-New Zealand sourced income to non-New Zealand resident beneficiaries;
  • Confidentiality: no details about the settlor or beneficiaries need to be provided to Inland Revenue;
  • Seamless succession by nominated beneficiaries to the investment assets on the settlor's death;
  • No need to prove probate in the New Zealand courts;
  • The settlor can revoke the arrangement at any time;
  • The arrangement can be terminated and re-established at any time during the settlor's lifetime;
The arrangement can also apply on the settlor's incapacity

Conclusion

The New Zealand Foreign Trust is a useful estate planning tool, allowing for continuity of ownership following the death of the settlor.  The combined asset protection benefits of trust ownership and the flexibility to distribute income and capital to those beneficiaries who require the funds, including the settlor, together with the tax exemption on foreign sourced income and limited disclosure obligations, make the New Zealand Foreign Trust an attractive holding structure for many global clients.

For more details, please contact us at info@jones-law.co.nz

The above article is provided for general information purposes and does not constitute legal advice.

The partners at Jones Law are internationally qualified and practise in the areas of cross-border tax planning, estate planning and acquisition structuring.

We invite you to contact us at info@jones-law.co.nz to discuss your specific circumstances.

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