In the past week or so we have be fascinated by the goings on of the WWW (world-wide wealthy). The so called "Panama Papers" leaked from Panamanian law firm Mossack Fonseca have exposed a lot of hiding behind foreign companies and trusts, and undoubtedly there may be some criminal or civil wrong doing somewhere as well as tax evasion, but it is not Mossack Fonseca nor the thousands of lawyers and accountants around the world that are responsible. It might be their clients, but how many suppliers are responsible for what their clients do?

And for the record, we don’t think New Zealand is a “tax haven” for the WWW – it’s just that our trust tax laws are different to other countries. New Zealand trustees of trusts set up for overseas beneficiaries have to declare their position to the New Zealand Tax Department, so it is not a question of hiding. If the tax law says they are not required to pay tax in New Zealand, then why would they? Rather it is a question of their clients (potentially) not disclosing their investments in their own country of residency – assuming that they have to.

The New Zealand “tax haven” claim is based on the simple principle that under New Zealand tax law, a New Zealand based trustee is not required to pay tax on income earned overseas (the source principle) if the settlor of the trust does not live in New Zealand (and has not from the later of 17 December 1987 and the settlement of the trust). And that folks is it in a nutshell. Of course, New Zealand is one of the few countries that has that rule. Most other first world countries have it the other way round, the trustee must pay tax in a country where the trustee is resident (regardless of the source rule or where the settlor lives).

But the “tax haven” tag has been around for some years, and while the Government strengthened disclosure rules a couple of years back, the level of disclosure is quite modest (except if Australians are involved). So where to next?

Overhauling New Zealand tax law on trusts would be extremely complicated and is likely to take years to wade through the possible changes and implications. The rules work perfectly well for New Zealand settlors and beneficiaries. In fact often New Zealand beneficiaries can be much worse off, with a tax rate of up to 45% on receiving a distribution from non-complying or foreign trusts, including being taxed on capital gains. Surely, New Zealand should be able to make laws that suit New Zealander’s not laws that suit other countries.

We suggest that the disclosure rules are the way to go. Increase what has to be disclosed by New Zealand residents to the New Zealand Tax Department. And foreign tax authorities should start asking New Zealand for that information under the mutual tax sharing agreements.

And perhaps, foreign jurisdictions should be looking at improving auditing of their own tax nationals affairs, not attacking a New Zealand tax law that has been around since 1987!

If you are a New Zealand resident with a trust, then your bigger concern is the adequacy of your own record keeping and compliance with current and proposed trustee and tax laws. See our sister company’s website for more information.

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