Amending legislation recently introduced in the New Zealand parliament proposes a number of amendments to the rules for how a trust is taxed when a settlor of the trust migrates to New Zealand. The proposed changes are a timely reminder that the rules applying to a trust when a settlor migrates to New Zealand are complex, and the application of those rules should be considered before the settlor arrives in New Zealand in order to avoid unexpected tax consequences.
Taxation of trusts under New Zealand law
New Zealand (like many jurisdictions) uses the concepts of residence and source to determine its jurisdiction to tax income and gains. A resident (for tax purposes) of New Zealand is subject to New Zealand tax on all income, wherever sourced. A non-resident is subject to New Zealand tax on income sourced from New Zealand.
In the case of trusts, New Zealand operates what is known as a ‘settlor’ regime. To determine whether trust income (that is not taxable in the hands of a beneficiary) should be considered to be derived by a New Zealand tax resident (and therefore subject to tax), New Zealand looks to the tax residence of the settlor(s) not the tax residence of the trustee(s).
The definition of ‘settlor’ for New Zealand income tax purposes is broad and includes any person who transfers value: (i) to the trust; or (ii) for the benefit of the trust; or (iii) on terms of the trust. There are also several deeming rules that expand the definition of ‘settlor’.
Trusts that do not have any New Zealand tax resident settlor are generally treated as ‘foreign trusts’. This generally has the consequence (provided certain disclosure requirements are met) that New Zealand income tax is imposed only on New Zealand-sourced income and distributions to New Zealand tax resident beneficiaries, even if the trustees are resident in New Zealand.
If a settlor becomes New Zealand tax resident, however, that changes. From that point, the trust's worldwide income may be subject to New Zealand tax.
Concessionary treatment may be available for migrating settlors
If a settlor of a foreign trust migrates to New Zealand (and becomes New Zealand tax resident), the trust (after a prescribed period) will automatically become a ‘non-complying trust’ unless certain elections are made. Distributions of New Zealand-sourced income and distributions to New Zealand tax resident beneficiaries from a non-complying trust are potentially subject to tax at the penal rate of 45%.
New Zealand's tax rules provide a concession under which a former foreign trust may be treated as a ‘complying trust’ if the necessary elections or disclosures are made within prescribed periods and New Zealand income tax obligations are satisfied (at the trustee rate of 33%) in respect of the relevant income. Distributions from complying trusts are not subject to further tax in the hands of beneficiaries.
The proposed changes are intended to confirm (retrospectively) which elections and disclosures allow a former foreign trust to qualify for the concessionary treatment.
The bill containing the proposed changes is not expected to become law prior to New Zealand's general election on September 19 2020.
Tim Stewart
T: +64 4 819 7527
