New Zealand is currently experiencing high levels of emigration, with record numbers of New Zealanders moving to Australia and other countries. A key issue that is commonly overlooked when family members move (or live) overseas is the impact this can have on family trusts.
Overseas tax liabilities can arise in relation to income, gains, and distributions from New Zealand family trusts if settlors or will-makers, or their trustees/executors or beneficiaries move overseas. To ensure that overseas tax impacts are known in advance, and where possible reduced or eliminated, specialist advice should always be obtained in advance of family members that are trustees moving overseas, and of any distributions to overseas-based beneficiaries.
It is not necessary for a person to be a permanent resident or citizen of a country to be subject to its taxes. Often all that is required for a person to be considered ‘tax resident’ or subject to tax in a particular country is that they primarily live or routinely spend a significant amount of time there.
The presence of only one co-trustee in an overseas jurisdiction can therefore be all it takes to expose the income and gains of a New Zealand trust to overseas tax (through the imposition of tax liability on the individual trustee) even where all trust assets are in New Zealand. This is due to many destinations (including Australia and the United Kingdom) taxing trusts and trustees based on the location of the trustees rather than the location of the settlor/will-maker (as is the case in New Zealand). Others, including many European countries, don’t recognise trusts at all.
Beneficiaries in overseas jurisdictions can also be taxed, on distributions they receive, even where all the trust property (and trustees) are in New Zealand.
Unless strict requirements are met, beneficiaries that live in Australia or the United Kingdom can for example be taxed at rates of up to 45% on distributions made by New Zealand trusts from retained trust income and/or capital gains (and can also be subject to a ‘deemed interest’ charge). The way trustees record and document a distribution will often be the determining factor as to whether overseas tax applies, or not.
Even where trustees are aware of the potential for overseas tax and take steps to try and address or eliminate it, ‘workarounds’ (such as a distribution to a New Zealand-based beneficiary followed by a ‘gift’ from that beneficiary to an offshore beneficiary) will usually not be 100% effective. Many offshore jurisdictions have anti-avoidance rules or ‘ordering’ rules that apply to distributions from foreign (e.g, New Zealand) trusts, where distributions of funds to New Zealand-based beneficiaries with a subsequent ‘gifts’ by those beneficiaries to Australian or United Kingdom-based beneficiaries will be treated as distributions direct from the trust to the overseas beneficiary and taxed accordingly if discovered. Loans can also be deemed to be distributions (and therefore taxed as distributions) in certain cases.
The recent proliferation of automatic information exchange agreements between tax authorities and the effect of anti-money laundering rules means that cross-border transfers and distributions are now often automatically reported to offshore tax authorities, and transactions involving trust income or gains, or funds sourced from trust distributions are far more likely to be questioned by offshore tax authorities than might historically have been the case. Workarounds should therefore be avoided in the absence of specialist advice, as other better options will often exist for delivering funds tax free from a New Zealand trust.
Overseas tax liabilities will not usually be a fait accompli where settlors, trustees or beneficiaries move overseas. In many cases there will be solutions or courses of action available to mitigate or eliminate the risk of an offshore tax liability where specialist advice is taken in advance of a settlor, trustee/executor or beneficiary moving offshore.
Our Private Client and Tax teams work closely together when advising trustees of affected family trusts and can advise on processes and appropriate documentation to implement to ensure that no unwelcome tax bills eventuate in such cases.
If you have any questions or need advice, please get in touch with a member of our Private Client or Tax teams.
Special thanks to Special Counsel Jo Giboney for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
