Foreign trust disclosure rules
(Clauses 5, 8(8), 8(9), 9(4), 10 and 11)
Summary of proposed amendments
New information disclosure rules are proposed for foreign trusts with a New Zealand-resident trustee. These include requirements for the trust to register with Inland Revenue, file annual returns and pay registration and filing fees. In addition, the register of foreign trusts would be shared with certain New Zealand government agencies.
The resident trustee of the foreign trust would need to comply with the registration and filing obligations in order to qualify for the exemption from tax on foreign-sourced amounts.
The proposed changes follow the Government’s April 2016 Inquiry into Foreign Trust Disclosure Rules which was set up to examine and make recommendations regarding disclosure rules and other related matters to ensure that New Zealand’s reputation is maintained.
The Inquiry concluded that, given the current environment of greater transparency and sharing of information, the current information disclosure rules are inadequate. The Inquiry recommended a number of amendments to the disclosure requirements for foreign trusts. On 13 July 2016 the Government announced it would adopt the Inquiry’s recommendations.
Application date
The amendments will come into force on the date of enactment.
Key features
Resident trustees required to register foreign trust
Resident trustees of a foreign trust will be required to apply for registration of the trust. As part of the registration, the resident trustee must provide certain information relating to the foreign trust to the Commissioner, including information relating to settlors and beneficiaries and the trust deed.
Foreign trusts formed after the date of enactment will need to register with Inland Revenue within 30 days. Existing foreign trusts will have to register by 30 June 2017.
Annual returns
Resident trustees of a foreign trust will be required to file annual returns, including the trust’s financial statements and details of settlements and distributions, made over the year. The annual return would also include any changes made to the information that is provided as part of the initial disclosure on registration.
The resident trustee will be required to file annual returns for every year that the trust is registered. The due date for annual returns corresponds to the foreign trust’s balance date, with the annual returns due three months after the trust’s balance date. If the trust does not have a balance date because it does not prepare financial statements, the return is due 30 June following the end of the tax year.
Existing foreign trusts will generally need to provide their first return under the proposed new rules by 30 June 2018.
Grace period for new migrants
There would be a “grace period” for New Zealand trustees who are new migrants and who are not in the business of providing trustee services. Under this grace period the registration and filing requirements would be delayed for two years. This would mirror the existing grace period for new migrants in respect of providing initial foreign trust disclosures.
Registration and annual filing fee
The proposed amendments include a registration fee of $270 and an annual filing fee of $50. The bill also proposes a regulation-making power which will allow the registration and annual filing fees to be amended by Order in Council.
Information sharing with other agencies
The information collected by Inland Revenue as part of the proposed new registration and annual filing processes would be shared with the New Zealand Police and the Department of Internal Affairs.
Sanctions for non-compliance
To qualify for the exemption for tax on foreign-sourced income, resident trustees of a foreign trust will have to be compliant with the disclosure requirements for registration, and will also need to fulfil their annual filing obligation.
In addition, it is proposed that the current “safe harbour” for qualifying resident trustees of a foreign trust be removed.
Background
A foreign trust is a trust with a foreign settlor. Foreign trusts with New Zealand-resident trustees are exempt from tax on foreign-sourced income.
There is currently no formal registration process for foreign trusts. However, the Tax Administration Act 1994 requires foreign trusts with a New Zealand-resident trustee to disclose certain information to the Commissioner of Inland Revenue upon establishment. The information required to be disclosed upon establishment is the name or identifying particulars of the foreign trust, the name of a New Zealand trustee, and whether there is an Australian settlor.
The Tax Administration Act also requires New Zealand-resident trustees of foreign trusts to keep certain records in relation to the foreign trust, including the trust deed, and (if they are known) the names and addresses of settlors who make a settlement on the trust and beneficiaries who receive a distribution. These records must be provided to Inland Revenue on request. If the information provided upon initial disclosure has changed, the New Zealand-resident trustee of a foreign trust must update the information, but annual filing with Inland Revenue is not otherwise required.
There are two forms of sanctions for non-compliance under the current rules. First, an intentional breach of a requirement to supply information to Inland Revenue can result in a fine of up to $50,000 and imprisonment for up to five years. Secondly, the foreign trust loses its tax exemption on foreign-sourced income if:
- a trustee is convicted of an offence for not providing information requested by Inland Revenue; and
- the trust does not have a “qualifying resident foreign trustee” for an income year. (A qualifying resident foreign trustee is a member of a specified professional body – for example, a member of the New Zealand Law Society or Chartered Accountants Australia and New Zealand.)
Inland Revenue shares information about foreign trusts with overseas tax authorities in countries with whom New Zealand has an agreement which includes information sharing provisions. This information is shared when requested by the overseas tax authority or proactively in instances where Inland Revenue considers that the information may be of interest to that tax authority.
Detailed analysis
Registration
Proposed section 59B requires resident trustees to apply for registration of the foreign trust.
This section also sets out the information that must be provided to Inland Revenue for registration, namely:
a) the name and other identifying particulars of the trust;
b) the date and detail of each settlement on the trust;
c) the name, email address, residential address, country of tax residence, and Taxpayer Identification Number for the following persons:
i. each settlor
ii. each person with a power under the trust deed to control the dismissal of appointment of a trustee, to amend the trust deed, or to add or remove a beneficiary
iii. each person with a power under the trust deed to control a trustee in the administration of the trust
iv. each trustee
v. for a fixed trust, each beneficiary and nominee for an underlying beneficiary;
d) for a discretionary trust, details of each class of beneficiary sufficient for the Commissioner to determine, when a distribution is made under the trust or when rights apparently vested under the trust are exercised, whether a person is a member of the class; and
e) a copy of the trust deed.
A new definition of “Taxpayer Identification Number” (TIN) is proposed in section 3(1) of the Tax Administration Act. A TIN is the equivalent of a person’s IRD number in the jurisdiction in which they are tax-resident.
Some foreign trusts have a trust “protector”. This is a person who is able to exercise some control over the trustee(s) under the trust deed – for example, the protector may have the ability to appoint or remove a trustee, or to veto the appointment or removal of a trustee. The Inquiry recommended that identity details of protectors be provided to Inland Revenue. Protectors are intended to be captured by (c)(ii) and (iii) in the above list.
The Inquiry also recommended that identity information of any other natural person who has effective control of the trust (including through a chain of control or ownership) should be provided. There are existing rules in the Income Tax Act 2007 that prescribe when a person will be treated as a settlor for the purpose of the trust rules. It is expected that the existing definition of settlor, in conjunction with the nominee look-through rule in section YB 21 will include situations where a natural person has effective control of the trust through a chain of control or ownership.
As part of the registration, the resident trustee must provide a signed declaration that the settlors, trustees and persons referred to under (c)(ii) and (iii) have been informed of, and have agreed to provide the information necessary for compliance with, the requirements relating to the provision of information imposed by:
a) the Tax Administration Act 1994;
b) the Anti-Money Laundering and Countering Financing of Terrorism Act 2009; and
c) the regulations made under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
The time limits for registration and the associated disclosure are provided in proposed section 59C. Foreign trusts formed after the date of enactment will need to register with Inland Revenue within 30 days of establishing. Existing foreign trusts will have to register by 30 June 2017.
Annual returns
Proposed new section 59D sets out the information that must be provided annually, and the time limits for providing this information and paying the associated fee.
Specifically, resident trustees must provide:
a) any changes to the information provided as part of registration;
b) the trust’s financial statements;
c) the date and nature of each settlement;
d) the name, email address, residential address, country of tax residence, and Taxpayer Identification Number of each settlor making the settlement;
e) the date and amount of each distribution made by the trustee of the trust in the year; and
f) the name, email address, residential address, country of tax residence and Taxpayer Identification Number of each beneficiary to which the distribution is made.
The resident trustee is required to file annual returns for every year that the trust is registered.
The specific time limits for filing an annual return are set out in proposed section 59D(3). The due date for annual returns corresponds to the foreign trust’s balance date, with the annual returns due three months after the trust’s balance date. If the trust does not have a balance date because it does not prepare financial statements, the return is due 30 June following the end of the tax year.
Existing foreign trusts will generally need to provide their first return by 30 June 2018.
Grace period for new migrants to comply with obligations
While most foreign trusts that are currently disclosed to Inland Revenue are professionally managed, a trust will also be a foreign trust if an individual who is the trustee of a family trust with a foreign settlor migrates to New Zealand (temporarily or permanently).
For example, take the situation of a person living in the United Kingdom (UK) who is the trustee of a family trust that was settled by the person’s UK-resident parents.
If that individual migrates to New Zealand (either temporarily or permanently), they would become a New Zealand-resident trustee of a foreign trust.
In this situation, the New Zealand resident trustee must comply with the foreign trust disclosure and record-keeping requirements. However, the current law provides a “grace period” for New Zealand trustees who are new migrants and who are not in the business of providing trustee services. Under this grace period the disclosure requirements are delayed for two years.
Proposed sections 59C(3) and 59D(1)(d) provide an equivalent grace period of two years, in respect of the new registration and annual filing obligations, for New Zealand trustees who are new migrants and who are not in the business of providing trustee services. This is intended to ensure that temporary migrants (such as workers on a short-term contract) are not caught by the new rules, and that new migrants have time to adjust to their obligations.
Registration and annual filing fee
Proposed section 59E of the Tax Administration Act prescribes the fees for registration and annual filing. The registration fee is proposed to be set at $270. The annual filing fee will be set at $50. This provision includes a regulation-making power to change the fee by regulation.
No tax exemption if trustee is non-compliant
Under the proposed amendment to section HC 26, a foreign trust with a resident trustee will lose its tax exemption unless the trustee has registered the trust and fulfilled the associated disclosure obligations at that time. However the exemption would still be available if the non-registration or disclosure was unintentional and was remedied immediately.
It is also proposed to repeal the current qualifying resident trustee safe harbour in section HC 26(3). As noted above, under current rules this safe harbour allows a trust to keep its tax exemption as long as one of its trustees is a “qualifying resident foreign trustee” (a member of a specified professional body). The definition of a “qualifying resident foreign trustee” in section 3(1) of the Tax Administration Act would consequentially be repealed.
Information sharing with other agencies
A proposed amendment to section 81(4) will allow Inland Revenue to share the register of foreign trusts with the Department of Internal Affairs and the New Zealand Police. This will give these agencies access to information about foreign trusts that they need for regulatory or law enforcement purposes.
Consequential amendment to record-keeping requirements
Currently, New Zealand resident trustees of foreign trusts are specifically required to keep records relating to the trust deed, and certain information about settlements and distributions under section 22(7)(d)(i) and (ii) of the Tax Administration Act. The trust deed and information about settlements and distributions would have to be provided to Inland Revenue under the proposed registration and annual disclosure requirements. As a consequence, it is proposed to repeal section 22(7)(d)(i) and (ii) because it is no longer necessary.