Introduction
Trusts are very common in New Zealand and are used for a variety of purposes. A trust which is resident in New Zealand and which meets the New Zealand Income Tax Act definition of a ‘foreign trust’ is not taxed in New Zealand on income it earns outside of New Zealand. A beneficiary of that trust, who is not resident in New Zealand, will also not be taxed in New Zealand on that income if it is distributed to the beneficiary. Take the following example.
Mary, who is not a New Zealand resident, settles a discretionary family trust. The beneficiaries are Mary, her husband and their children. Under the trust deed (the document that establishes the trust) Mary can add further beneficiaries in the future and change the trustee if she wishes. The trustee of the trust is M Trading Limited, a New Zealand incorporated company. Mary is the sole director of the company.
Mary transfers to the trust shares in companies incorporated outside New Zealand and the rights to royalties paid for the use of IP used outside New Zealand. Mary also lends money to the trust which it deposits in Euro denominated interest bearing accounts in the name of M Trading Limited.
The trust pays no New Zealand tax on dividends received from the shares, the royalties paid for the use of the IP or the interest paid on the deposits. When the trust distributes that income to Mary or her family those amounts are not taxable in New Zealand because Mary and family are not resident in New Zealand.
The rest of this fact sheet explains:
What is a trust?
What are the benefits of a trust?
What is an NZ foreign trust?
What is a Trust
Trusts are a concept of the common law the legal system that developed in England and which now applies there and in its many former colonies. The common law countries include the United States, Canada, Australia and New Zealand.
A trust exists where a person (the trustee) owns property on behalf of other people (the beneficiaries). The trustee has ‘legal’ title to that property but must deal with the property only for the benefit of the beneficiaries. Under a discretionary trust, which is the most common type in New Zealand, individual beneficiaries do not have a fixed interest
in the assets of the trust. Instead the trustee decides what any beneficiary will receive under the trust.
A trust is not a separate legal person like a company but it can sometimes be treated like one for some purposes. For example, if a trustee owns investments for the trust, the investments are registered in the name of the trustee. However, for tax purposes, the trustee is taxed on those investments separately from any income the trustee might have in their personal capacity.
The trustee of a trust can be a natural person, or persons, or it can be a company. There is no need for the name of the company to refer to the trust. For example, the trustee of the Smith Family Trust could be Smith Family Trust Corporate Trustee Limited but it could also be Smith Holdings Limited or London Holdings Limited or any other name that is available for registration for a company in New Zealand.
What are the Benefits of a Trust
There are a number of possible benefits from establishing a trust. In particular:
Creditor protection. If assets are owned by a trust, they do not belong to the person who established the trust (or the beneficiaries of the trust) and that person’s creditors cannot claim an interest in those assets. For example, if a beneficiary of a trust becomes bankrupt, their creditors are generally not entitled to claim the assets of the trust. This can also be the case where a former spouse or partner of a person claims part of their assets when their relationship breaks up.
Flexibility and control. The beneficiaries of a trust can be a large group eg, the person who established the trust, their children, grandchildren, their brothers and sisters, nieces and nephews, etc. The trustee decides who of these are to receive any benefit under the trust. A person can set out in their will who is to receive their property after they die. However, wills can be challenged in court. If a person moves their assets to a trust, then the those assets would generally not be covered by their will or any challenge to that will.
Tax. An NZ foreign trust does not pay New Zealand tax on income earned outside New Zealand and that income is not taxed in New Zealand when distributed to a nonresident beneficiary of the trust.
What is an NZ Foreign Trust?
For New Zealand income tax purposes, trusts are divided into three types. An NZ ‘foreign trust’ is a trust where:
the trustee of the trust is resident in New Zealand for tax purposes; and
and no ‘settlor’ of the trust is resident in New Zealand.
A company incorporated in New Zealand is resident in New Zealand for tax purposes.
The ‘settlor’ of a trust is the person who gives the property that is the subject of the trust to the trustee. For tax purposes, this definition is extended to include, broadly, any person that transfers a benefit to a trust. For example, a person who lends money to the trustee of a trust at a below market rate of interest will be a settlor of the trust for tax purposes.
Where a trust is an NZ foreign trust, it does not pay New Zealand income tax on income that has a source outside New Zealand. That is, income such as dividends paid on shares in a company not resident in New Zealand, interest paid on money on deposit outside New Zealand and royalties paid for the use of intellectual property outside of New Zealand.
Where an NZ foreign trust then distributes income with a source outside of New Zealand to a beneficiary of the trust who is not resident in New Zealand, the beneficiary is also not subject to New Zealand tax on that amount
If a person who is a settler of a trust that has been treated as an NZ foreign trust decides to become resident in New Zealand the tax treatment of the trust would change.
Note: The information in this fact sheet is of a general nature only and should not be relied on as legal advice. If you are interested in establishing an NZ foreign trust we can discuss the detailed provisions with you based on your particular circumstances and requirements.
