Tax expert, John Shewan recommends to the New Zealand Government that registration of foreign trusts be tightened with more disclosure details.
The much expected report was released to the public today. See the media release from the Government here. Mr Shewan's report says that the foreign disclosure rules are not fit for purpose and makes sweeping suggestions. These include:
- The name, email and physical address of the settlors, non-resident trustees, protectors and appointors, and any other persons or entities with control over the trust, plus
- Disclosure of beneficiaries including the underlying beneficiaries
- Plus their country of residence and tax identification number
- An annual filing fee
- Filing of annual accounts
- The disclosure of this information to authorised agencies (i.e. foreign tax authorities)
Bill English, the Finance Minister, has said the Government will "would look to implement the recommendations after officials have examined the inquiry in detail and reported back to ministers".
While its is proposed that the new disclosure rules will apply to new foreign Trusts, existing ones will be given a period of grace to also file the necessary information.
Foreign Trusts have become a bit of an easy target in New Zealand by those who claim New Zealand is a "tax haven". As we have said before, New Zealand trust law is very robust, and trustees based in New Zealand have significant obligations, which were introduced a number of years ago. Unfortunately, some of the obligations on disclosure only apply to trusts based in Australia, effectively keeping other countries in the dark on their residents trust activities.
However, to call New Zealand a tax haven is an extreme exaggeration. New Zealand trust laws were rewritten in 1987 and while they may be different to other countries it is a bit of a stretch to see our law as making New Zealand a tax haven. In fact the only reason they are viewed as a "tax haven" in other countries is because the tax laws different between countries. New Zealand bases its trust tax obligations on what is known as the "settlor regime". If the settlor lives (or has lived) in New Zealand then the trust is subject to New Zealand tax (subject to some exceptions). If the Settlor has never lived in New Zealand, AND the income is NOT derived in New Zealand (the "source rule"), then the income is not taxed in New Zealand. But, if the income IS derived in New Zealand then New Zealand will tax it (foreign trust, foreign resident or not).
Much public and media comment has been made by those who don't understand these rules that these "foreign trusts should pay tax in New Zealand!" If the investments were in a New Zealand bank account, held in New Zealand shares, New Zealand property or operated as a New Zealand business or company they would pay tax in New Zealand. But if the investments are not in New Zealand then why should they when the ultimate owner of those investments doesn't live in New Zealand? That's like saying that, even though you live in New Zealand, because your accountant or lawyer lives in France, then you and your New Zealand business and investments should pay tax in France!
The term "tax haven" is relative. Many countries have what under New Zealand tax law would be considered a "tax haven" - typically a person working in one country, but living in another "guest" country as a "tax resident" while citizen of a third. They may only pay tax in the working country on the days physically present, and nothing in the tax resident country if they keep their earnings and investments offshore. These tax rules apply to many countries such as the United States, France and Spain to name just three. Are they also tax havens?
For my information on Family Trusts, visit www.myfamilytrust.co.nz