What is a foreign trust?
A foreign trust is a trust set up in New Zealand with New Zealand resident trustees, however the beneficiaries and settlor(s) of the trust reside overseas (i.e. outside New Zealand's tax jurisdiction). Foreign trusts are also known as 'offshore trusts' or 'New Zealand exempt trusts'.
Commonly, New Zealand foreign trusts derive all of their income and hold all their assets offshore.
New Zealand foreign trusts have become very popular with overseas investors and business people. At the present time there is believed to be circa 10,000 registered foreign trusts in New Zealand and the number seems likely to continue to increase. This is for a number of reasons, as outlined below.
Why are NZ foreign trusts so popular?
New Zealand trusts are useful structures, providing both asset protection and estate planning benefits. These benefits for New Zealand resident persons are canvassed elsewhere in blogs and articles on this site, so we will not repeat the benefits of trusts for Kiwis in this discussion.
For overseas residents (non New Zealanders), however, having a trust in New Zealand offers additional advantages and particularly good tax advantages.
New registration and annual filing rules for foreign trusts
Tax advantages of foreign trusts
With the way New Zealand tax law works at time of writing, it is possible to set up a trust in New Zealand and have no tax obligations here.
Our tax laws are such that no tax is payable in New Zealand on trust income or beneficiary distributions as long as:
- none of the trust's income is derived in NZ;
- beneficiaries are not NZ residents; and
- no settlor (with a settlor being anyone who has gifted or provided value to the trust) has been tax resident of NZ from the time the trust was settled.
It is the last point that is the most significant (i.e. the focus on the tax residence of any settlors). Most other countries focus on the residency of the trustees, i.e. trusts must file tax returns and pay tax in the country where the trustees reside. New Zealand is unusual in that its focus is on the residency of the settlor(s).
Additionally, because New Zealand doesn't have capital gains tax, any increase in the value of trust assets is normally not taxed here either.
Note, this does not mean that the trust never has to pay tax at all. Generally trust income and distributions made to beneficiaries will be taxed in the country of income origin/source. It does, however, prevent the trust or beneficiaries from being taxed twice, which can occur if you have the wrong tax structures set up.
In early 2017 new rules were introduced with regard to registration and annual filing obligations for foreign trusts. Specifically, all foreign trusts now need to go through a registration process with the New Zealand IRD which sees details such as a copy of the trust deed, contact and identification details of settlors, trustees and holders of the power to appoint and remove trustees provided to the IRD. Further, details of beneficiaries and settlements on the trust are also to be provided. All this needs to be provided to the IRD within 30 days of the establishment of the trust.
On an ongoing basis, a return needs to be filed once a year with a copy of financial statements for the trust provided, along with details of any settlements on the trust and any distributions made from it. It is anticipated that the information the IRD obtains through this registration and annual compliance programme will be provided to jurisdictions where the settlors, trustees and appointors reside.
If the registration and annual filing requirements are not met then the foreign trust losses its exemption from having to pay tax on foreign sourced income in New Zealand.
New Zealand's business environment reputation is excellent
New Zealand has an excellent reputation from political, legal, business and economic perspectives, and is a well-respected member of the OECD. As such, it is seen as a stable, safe environment to conduct business.
Furthermore, the way trusts are administered and managed in New Zealand is considered to be superior, and NZ foreign trusts are perceived to be among the best in the world. It's worth noting that many countries do not have trusts at all or have different rules surrounding how trusts are handled from a tax, insolvency and matrimonial perspective. In many countries, trust assets are treated as individual property for the purposes of dealing with creditors, insolvency and matrimonial concerns. In New Zealand, trusts are treated as reserved assets for all of the beneficiaries of the trust and protected as such. This is not the case in many OECD and other countries.
Because of its good standing, New Zealand is not black listed as a 'tax haven' country, even though it offers excellent tax advantages like no capital gains taxes. This makes establishing a foreign trust a very attractive and low risk option for overseas investors.
Flexibility and protection
The trustees of NZ foreign trusts have wide discretionary powers, giving them flexibility, but without compromising the interests of the beneficiaries.
What are the costs for setting up a foreign trust?
The costs involved with establishing and running a New Zealand foreign trust are at the low end of the scale compared with many other types of investment structures in New Zealand and around the world. One of the reasons for this is that audits of trust financial statements are not required.
Advantages for new immigrants
For four years after the settlor becomes a tax resident in New Zealand, a foreign trust migrating to New Zealand does not have to pay tax on offshore-sourced income. However, before the four-year exemption time limit is up, the settlor must elect for the trust to become a complying trust or serious adverse tax consequences occur. For example, your capital in a trust can become taxable on distribution if the migration process is not completed in a complying fashion. Migrants seeking to utilise foreign trust structures must take specific individual advice from a qualified professional in this regard and follow it carefully.
Establishing a foreign trust in NZ
It is important to get professional advice regarding the establishment of a foreign trust. It must be set up correctly if it is to provide the asset protection you desire, and this is something we specialise in at GRA.
It is also highly advisable to use a New Zealand professional trustee to oversee the administration of such a trust to ensure it is run correctly and meets all its legal obligations. GRA provides a professional trustee service, and was awarded the inaugural Corporate Trustee of the Year award by the New Zealand Corporate Trustees Association in 2009.
If you would like to know more about NZ foreign trusts, then please contact GRA, or email Matthew Gilligan email@example.com.
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Disclaimer: Nothing in this article is intended to be specific advice suitable to be relied upon by the public or any individual reader. Instead anyone seeking to rely on matters in this article should take specific individual advice from a suitably qualified professional and further should ensure that tax law has not changed since time of writing to ensure that the comments in this article are still valid and consistent with New Zealand tax law which does change over time.
Hi Janet, I attended the GRA function last night – it was excellent, and goodness your knowledge is like an encyclopaedia! Phenomenal. We have already had an initial free consult with John Rowe, have attended one of Matthew’s info evenings, and are already booked for Property School. I’ve read Tax Structures and am reading Property 101. We are very interested in moving to you for accounting also – our current accountant is lovely, and his fees are very low, but the more I’m learning, the more I’m realising this sweet man has oftentimes not steered us in the best directions, and definitely never asset structured us properly – and that is all in the plans to get sorted thx to getting to know GRA.
Tat & Trip - June 2016