To understand and, where possible, reduce or eliminate overseas tax exposure, specialist advice should be obtained before trustees relocate offshore or any distributions are made to beneficiaries based overseas.
How tax residence affects obligations even without citizenship
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.
A single offshore trustee can trigger foreign tax
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 overseas can also face tax liabilities
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.
Workarounds are usually ineffective and can attract scrutiny
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. In such cases, distributions made to New Zealand-based beneficiaries with subsequent gifts by those beneficiaries to Australian or United Kingdom-based beneficiaries will be treated as distributions made directly from the trust to the overseas beneficiary, and taxed accordingly if discovered. Loans can also be deemed to be distributions (and therefore taxed as such) in certain cases.
Increased reporting and automatic gateway for disclosure
The growing number of automatic information exchange agreements between tax authorities, as well as stricter anti-money laundering (AML) rules means that cross-border transfers and trust distributions are now often automatically reported to overseas authorities.
As a result, transactions involving trust income, capital gains, or distributions are more likely to be scrutinised than in the past.
Seek advice before making decisions or distributions
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.
How we can help
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.
