New Zealand trust disclosure rules: Not fit for purpose but fixable
Tax Alert - July 2016
By Emma Marr
John Shewan’s Report regarding the Government Inquiry into Foreign Trust Disclosure Rules (Inquiry) was released on 27 June 2016, delivering a very clear and targeted summary of the deficiencies of the current regime and recommendations for improvement. The Report does not pull any punches in describing the existing foreign trust disclosure rules as inadequate, not fit for purpose, and light-handed. Nevertheless, the Report correctly (in our view) identifies the appropriate solution to be enhanced information disclosure requirements and regulation, as well as education around the perceptions of the rules, rather than the repeal of the foreign trust tax exemption altogether. Initial indications are that the Report recommendations will receive cross-party political support and that the Government will provide a formal response to the Report in the coming weeks.
Re-setting the conversation
It is important, as noted in the Report, to re-set the conversation by identifying what is actually wrong with our foreign trust regime, so that the real risks are recognised and addressed, and misleading perceptions are corrected.
The Inquiry was commissioned in light of the extensive publicity around the so-called Panama Papers, a cache of documents that has never been publicly released and was not available to the Inquiry. The papers are alleged to detail extensive use of New Zealand’s foreign trust regime by high-wealth individuals to evade tax, hide assets and launder money.
The perception that there is a problem with the foreign trusts regime was based largely on media coverage that created the unfortunate misconception that either large amounts of offshore money was being hidden in New Zealand, or that New Zealanders were themselves exploiting foreign trusts to evade tax. However, the foreign trusts tax exemption is not available in either of those scenarios. The taxation of trusts in New Zealand is based on the principle that foreign sourced income derived by non-residents is not taxable in New Zealand. This is consistent with the fundamental principles of our taxing legislation and international norms, and does not make New Zealand a tax haven.
The current status – a “light-handed” regime
The real problem is that our minimal disclosure requirements and almost non-existent sanctions for failure to comply with the rules provide little assistance to other countries in determining whether their own tax base is being diminished by non-residents using the New Zealand regime to evade tax in their own country.
If another country taxes trusts in a different way from New Zealand, this provides opportunities for residents of that other country to take advantage of the mismatch in rules and not pay tax anywhere. Similarly, tax evaders may benefit from our limited disclosure requirements in concealing income that would be taxable in their own country. In either scenario, non-residents could correctly conclude that there is a very low risk of New Zealand authorities either having or passing on information that would identify them to their home jurisdiction’s authorities.
Is there any reputational harm?
This lack of information is a major concern identified by the report. A key reason for initiating the Inquiry was ensuring New Zealand’s reputation as a nation that co-operates with other countries to deter tax avoidance, is maintained. The Report concludes that as there is a “reasonable likelihood” that the regime is facilitating the concealment of funds or evasion of tax in other countries, our tax treaty partners could reasonably expect that New Zealand would do something to remedy that situation.
What should the Government do to fix this?
The Report outlines four options for reforming the foreign trust rules, ranging from moderately enhanced disclosure requirements to removing the tax exemption on foreign sourced trust income entirely. The option preferred by the Report is a significant increase in initial and ongoing disclosure requirements and improvements to the supporting legal framework. This many-pronged response to the current deficiencies includes:
- Enhanced registration requirements, including a register of trusts searchable by regulators;
- Detailed disclosure upon registration, including detailed information about settlors, protectors, trustees, other natural persons who have control of the trust, and beneficiaries, as well as a copy of the trust deed;
- Ongoing annual returns disclosing changes to any information provided on registration, and details of all distributions made during the year, including the recipients;
- Registration and annual filing fees;
- Expansion of scope of the Anti-Money Laundering and Countering of Foreign Terrorism Act 2009 to apply to lawyers and accountants who advise foreign trusts; and
- Suspicious transaction reporting.
A key objective of the recommendations is to introduce a deterrent for failure to comply. Foreign trusts that do not comply with the registration and ongoing filing obligations will not be exempt from New Zealand tax.
The Report envisages that the recommended changes will discourage non-residents who are currently relying on the secrecy inherent within our rules to hide taxable income from their own jurisdiction, and will remedy the perception that New Zealand has weak foreign trust disclosure and reporting rules.
What happens next?
Although the Government has not formally responded to the Report, Prime Minister John Key has indicated the Government is broadly supportive of the proposals, with support also indicated from the Labour Party. It is understood a formal response will be provided next month. The Report recommends a transitional period with new trusts required to comply with the new disclosure rules once the new legislation is enacted, existing trusts required to comply by 30 June 2017, and an annual foreign trust return required for income years starting from 1 April 2017.