Foreign trust reform legislation introduced
Tax Alert - September 2016
By Emma Marr
New Zealand resident trustees of foreign trusts are likely to only have a few months to get up to speed with new trust rules as a result of a bill introduced to Parliament on 8 August 2016 (the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill). As foreshadowed in the Government’s response to the Shewan Inquiry in July 2016, the majority of the recommendations made by the Shewan Inquiry (covered in more detail here) have been incorporated into the draft legislation. The bill submission timeframe is only 1 month as it appears the Government is in a hurry to get these measures enacted.
The key points to note are that extensive information will need to be provided to Inland Revenue when initially registering foreign trusts (and if any of that information subsequently changes), and every year following, by filing annual returns with Inland Revenue. Foreign trusts formed after the date of enactment of the bill will need to register with Inland Revenue within 30 days, while existing foreign trusts will have to register by 30 June 2017. Annual returns must be filed three months after balance date (or by 30 June if the trust has no balance date). Existing trusts will generally be required to provide their first annual return by 30 June 2018.
The disclosure rules are extensive enough that any foreign trusts currently using the New Zealand foreign trust regime for secrecy purposes because of the current limited disclosure rules are likely to find the new rules unpalatable. The rules may be a catalyst for such trusts finding a new jurisdiction in which to operate, in which case the new rules may arguably have achieved at least one of their objectives.
Registration and annual returns
On registration, the trustee must provide Inland Revenue with extensive information about the trust, including details of all settlements and a copy of the trust deed. The trustee must also provide specific identifying information (including names, addresses, email addresses and Taxpayer Identification Numbers) for any settlor, trustee, beneficiary or class of beneficiary, and for any person with one of a variety of powers, such as the power to dismiss a trustee, amend the trust deed, add or remove a beneficiary, or control a trustee in administering the trust.
The trustee must provide a signed declaration that the people with powers over the trust deed or the trustee have been informed of, and have agreed to provide the information necessary for compliance with, relevant tax and anti-money laundering legislation.
If any details provided on registration subsequently change, the trustee must advise Inland Revenue of this change within 30 days of the trustee becoming aware of the alteration.
Every year, the trustee must provide an annual return disclosing financial statements, details of all settlements, distributions, and specific identifying details of all settlors and beneficiaries.
It is proposed to charge fees for registration of foreign trusts ($270) and for filing an annual return ($50).
Consequence for failure to comply
The consequence for a failure to comply is very straightforward: loss of the tax exemption for any income derived by the trustee. The tax exemption is only available if the trust is registered before the income is derived, and the trustee complies with all the record keeping and disclosure requirements in the tax legislation. The commentary states that if the failure to comply is unintentional and is immediately remedied the tax exemption will still be available, however it is not clear how the draft legislation achieves this outcome.
New migrants who are not in the business of providing trustee services will have a two year grace period before they are subject to the new rules. This is a sensible measure, as it will give people who are, for example, a trustee of a family trust, time to re-organise their affairs after migrating to New Zealand and inadvertently finding they are subject to the New Zealand foreign trust rules.
Information collected by Inland Revenue as part of these disclosure rules will be shared with the Police and the Department of Internal Affairs.
The Government has acted impressively quickly in keeping to their commitment to adopting the recommendations of the Shewan Inquiry. Provided that the new rules are consistently and visibly enforced, the result should be an improvement in the perception of our foreign trust rules.