Income tax implications for capital gains distributed to New Zealand beneficiaries through Australian discretionary trusts
Tax Alert - November 2021
By Joanne McCrae & David Watkins
We frequently see clients move to Australia without considering the implications for their New Zealand settled trusts. A recent Australian tax case has put the spotlight on such trusts which could have tax consequences for New Zealand resident beneficiaries in certain situations.
Distributions through a discretionary trust of current year income or capital gains are typically considered to retain the characteristics in the hands of the beneficiary. In Australia, as in New Zealand, beneficiaries are generally only taxable on current year income distributed to the extent they are resident in the country, or the income is sourced from that country.
This premise was tested in relation to capital gains in the recent decided Greensill Case. Briefly, the facts of this case involved:
- a discretionary trust (the Trust);
- a trustee, who was an Australian tax resident; and a
- beneficiary, who was tax resident in the UK;
Broadly, the Trust made capital gains in 2015-2017 from disposal of shares in Greensill Capital Pty Ltd of AU$58million. Greensill Capital Pty Limited was an Australian financial services company which owned Greensill Capital Management Company (UK) Limited, Greensill Capital (UK) Limited and other entities both in Australia and overseas.
All of the capital gains were distributed to the beneficiary, Alex Greensill, who was living in the UK and classed as non-resident for tax purposes in Australia. The shares in Greensill Capital Pty Ltd disposed of by the Trust were not taxable Australian property, broadly speaking, on the basis that neither Greensill Capital Pty Ltd nor its subsidiaries owned any material Australian real property.
Ordinarily (and leaving aside the trust related complications), a capital gain on non-taxable Australian property made directly by a non-resident is disregarded for Australian tax purposes. However, in the case of a non-resident beneficiary being distributed gains in respect of the disposal of non-taxable Australian property, the Federal Court of Australia determined there was no exemption available because of the specific codified provisions that deal with trusts and capital gains. The consequence was that the Australian trustee was required to pay income tax on behalf of the non-resident beneficiary in respect of the capital gain on the disposal of the non-taxable Australian property.
You might say why would we be concerned about this in New Zealand? Isn’t this a rare issue or shouldn’t it only apply to Australian shares? Let us take a simple set of facts to illustrate this:
A New Zealand resident (settlor) settles a trust, the trustee of which is a Trustee company controlled by the settlor. The trust holds investment properties in New Zealand for the benefit of the settlor’s adult children who all live in New Zealand. At some stage after settling the property, the settlor moves to Australia but continues to be a director of the Trustee company. The Trust may therefore become tax resident in Australia at this point by virtue of the company trustee becoming Australian resident.
Each year investment income is derived and distributed to the children. This is not taxable in Australia as it is foreign (New Zealand) sourced income distributed to foreign (New Zealand) beneficiaries. However, in 2021, the properties are sold, there are capital gains derived of NZ$30million and the Trustee resolves to distribute these to the New Zealand resident beneficiaries.
The Greensill case determined that unlike the exclusion for foreign sourced income distributed to foreign beneficiaries, there is no such exemption for capital gains. Instead, the trustee is treated as being the recipient of the capital gain amounts irrespective of where the gain is sourced. Given the gains are then distributed to the New Zealand resident beneficiaries, Australian tax is deemed payable by the trustee on their behalf. The result of this is that the New Zealand resident beneficiaries are subject to Australian tax at non-resident tax rates (between 32.5% and 45%) on capital gains derived from New Zealand property. This would not have been the case if the New Zealand resident beneficiaries had held this property directly or if the New Zealand settled trust had retained a New Zealand resident trustee after the migration of the settlor to Australia.
There is an interesting question as to whether there could be relief under the New Zealand-Australia Double Tax Agreement but in the Greensill matter, the treaty analysis in the context of the Australia / UK treaty was not considered by the courts.
We frequently see clients move to Australia without considering the implications for their New Zealand settled trusts. This serves as a big warning regarding inadvertent implications that can arise if you do move to Australia and remain a trustee of a trust. Changing the trustee at a later point can also give rise to a deemed capital gain on the appreciation in value over the time the trust had a resident trustee.
The key learning is to ensure you obtain full advice before moving overseas while holding assets in trusts.
Please contact your usual Deloitte advisor for more information.
November 2021 Tax Alert contents
- Significant reporting and disclosure changes looming for New Zealand trusts
- Income tax implications for capital gains distributed to New Zealand beneficiaries through Australian discretionary trusts
- The property parent trap
- PAYE and NRCT simplification coming for cross-border workers
- Are my debt levels subject to the Arm’s Length Test?
- Updated political agreement on global tax reform
- Operational Taxes update: New W-8 series forms – are you ready?
- Snapshot of recent developments