The New Zealand Offshore Trust

In recent years, with the Organisation for Economic Co-operation and Development (‘OECD’) and the Financial Action Task Force (‘FATF’) shining the spotlight on offshore jurisdictions, New Zealand has become an alternative jurisdiction for the establishment of offshore trusts. This article gives a detailed and in-depth look at the factors to be considered and benefits to be gained by starting a foreign trust in New Zealand.

The New Zealand Foreign Trust Regime

The New Zealand government introduced a new tax and trust regime on 1 April 1988, with the intention of rationalising New Zealand’s international tax rules. This regime included structures designed to attract international fund management business and financial institutions to New Zealand. Part of the new regime made provision for a non-New Zealand resident settlor to settle a trust with a New Zealand resident trustee, without exposing that trustee, the trust, or its beneficiaries, to New Zealand tax.

Benefits of the New Zealand Foreign Trust

A driving force behind the increasing popularity of the New Zealand foreign trust as an offshore planning vehicle is that unlike traditional tax haven jurisdictions, New Zealand is a reputable OECD member country, with a stable legal, political and economic environment.

Because of its international standing, New Zealand is not on any ‘black list’ of tax havens. The establishment of a New Zealand trust does not trigger special reporting by a settlor in any jurisdiction (eg Cayman Islands or Bermuda trust).

In addition, New Zealand’s compliance and reporting requirements for foreign trusts are not onerous. No tax reporting or disclosure as to the existence of the trust is required, no registration or filing of the trust is required with any public body, and no audit of the trust is required.

New Zealand also has substantial and economically priced professional legal and accounting resources, as well as a developed financial infrastructure.

A foreign trust may qualify as a New Zealand resident for preferential treatment under New Zealand’s several double taxation agreements.

These factors, combined with New Zealand’s modern and flexible trust law, makes New Zealand a beneficial jurisdiction for establishing offshore trusts.

Technical Aspects of the Exemption from New Zealand Tax

Tax exemption for foreign trusts

A trust will constitute a ‘foreign trust’ in terms of the Income Tax Act 1994 (‘ITA’) if from the later of 17 December 1987 or the time of the first settlement on the trust to the date of the relevant distribution no settlor was resident in New Zealand.¹ The non-New Zealand sourced income of a foreign trust is exempted from New Zealand taxation, whether that income is accumulated or is distributed to non-New Zealand resident beneficiaries.²

The regime is sometimes known as the ‘settlor regime’, because the tax treatment of a foreign trust turns upon the tax residency of the settlor. The definition of ‘settlor’ is therefore critical to this rule. The term broadly includes any person who confers a benefit on a trust for less than market value consideration.³ Accordingly, for a trust to retain its status as a foreign trust, it is important that no inadvertent settlements are made upon the trust by a New Zealand resident.

Source rules

Care must be taken to ensure that the foreign trust does not derive income from New Zealand in terms of the source rules contained in the ITA.⁴ The source rules specify the classes of income that are to be treated as having been derived from New Zealand. The classes of income are far-reaching and include income derived from contracts made (wholly or partly) or performed in New Zealand.⁵ Therefore, in certain situations, it may be advisable to have the management of the activity carried out outside of New Zealand.

Gift duty

Liability for gift duty in New Zealand is determined according to the concepts of domicile and situation of property. A person’s domicile is determined according to the provisions of the Domicile Act 1976, which adopts and modifies the common law principles of domicile.

Section 6 of the Estate and Gift Duties Act 1986 (‘EGDA’) provides that when the donor is a non-New Zealand domiciliary, gift duty will still apply in respect of the gift of property ‘situated in New Zealand’.⁶ With regard to a foreign trust, any substantial gift of assets would normally only be made by an individual who is a foreign domiciliary, but what is important is that the gift is made whilst the assets in question are situated outside New Zealand.

Appointment of a New Zealand Resident Trustee

A number of professional New Zealand trustee companies now provide New Zealand based trustee services to foreign trusts. New Zealand law provides for special co-trusteeships (custodian and managing trustees), as well as for the appointment of persons to advise the trustee (advisory trustees).⁷ Alternatively, and of particular relevance to non-New Zealand financial institutions, a private trustee company can be formed to act as trustee of a foreign trust.

Operating requirements

Whether the trustee is a professional New Zealand trustee company or a private trustee company, it must comply with New Zealand law. Areas of particular relevance are:

• The activity of the New Zealand resident trustee may be restricted by the New Zealand source rules. In these instances, certain aspects of the administration of a foreign trust must be carried out outside of New Zealand.
• Likewise, settlement of assets on the foreign trust must be carried out outside of New Zealand and must not relate to New Zealand situated property.
• A New Zealand resident trustee is a ‘financial institution’ in terms of New Zealand’s Financial Transactions Reporting Act 1996 and as such ‘know-your-client’ and reporting obligations apply.
  

Private trustee company

A private trustee company (‘PTC’) can be formed by a non-New Zealand resident to act as trustee of a foreign trust. The PTC may be wholly foreign owned and its directors may be non-New Zealand residents. A PTC does, however, have certain requirements beyond the operating requirements mentioned above. In particular, it must operate as a trustee company (and not as a trading company) and it is required to file annual returns and pay New Zealand taxation on its own operational income. If its shares are owned directly by a foreign person, a PTC must also file audited accounts with the New Zealand Companies Office.

For the above reasons, and to ensure compliance with changing law, most PTC clients appoint a professional New Zealand trustee company to provide management services for the PTC.

New Zealand’s Modern Trust Law

The Trustee Act 1956 (‘TA’) is the foundation legislation governing trust law in New Zealand. Where the TA does not deal with a particular matter, UK derived common law applies.

Investments and trustee’s duties

One feature of the TA is the ‘prudent man’ test for regulating the power of trustees to invest.

Section 13B of the TA provides that a trustee exercising any power of investment shall exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others. Section 13C provides that the threshold of this duty is greater where a trustee’s profession or business is or includes acting as a trustee or investing money on behalf of others. Section 13D provides that the duties imposed on a trustee by ss 13B and 13C shall apply only so far as a contrary intention is not expressed in the trust deed.

Perpetuities

The common law rules regarding perpetuities are incorporated into the Perpetuities Act 1964, which allows for an election to have a perpetuity period of up to 80 years.⁸

Co-trustee structures

Custodian/managing trustee structure

The TA allows for the appointment of a corporation as trustee (the ‘custodian trustee’) to hold title to all the trust property as if it were sole trustee.⁹ The management of the trust property and the exercise of all powers and discretions exercisable by the trustee under the trust remains vested in the remaining trustee (the ‘managing trustee’).¹⁰  The law relating to this structure is derived from the UK Trustee Act 1908, and is therefore found in many common law jurisdictions.

The managing trustee directs the custodian trustee in relation to the trust property and the custodian trustee is not liable for any act or omission performed or not performed in accordance with those directions.¹¹ Thus, the sole function of the custodian trustee is to hold the trust property and to invest or distribute it as the managing trustee directs. However, if it happens that the custodian trustee disagrees with the directions of the managing trustee, the custodian trustee can apply to the court for directions.¹²

The management of the trust is left in the hands of those closely connected with the trust property and the beneficiaries. If it becomes necessary to change the managing trustee, there is no need to re-title the assets of the foreign trust, these remaining at all times in the name of the custodian trustee. In addition, when it is important to maintain confidentiality, certain information concerning the trust and its activity can be held exclusively by the managing trustee.

Advisory trustee structure

The TA allows for a foreign trust to appoint a third party as an adviser to the trust (the ‘advisory trustee’).¹³ The advisory trustee is authorised to give advice to the normal trustee (the ‘responsible trustee’) on all matters relating to the administration of the trust.¹⁴ This includes investments and distribution decisions. The responsible trustee is not required to follow the advice given, but if it does so, receives special protection against any liability.¹⁵ The advisory trustee is specifically deemed not to be a trustee or fiduciary,¹⁶ and as such incurs no fiduciary liability.

A foreign trust structure incorporating an advisory trustee has many advantages. It allows for a third party to advise the responsible trustee on all matters relating to the trust, while at the same time offering an additional level of protection for the responsible trustee from liability for following the advice.

Foreign Trusts and Tax Treaties

A foreign trust will qualify for benefits under a tax treaty if it is resident in New Zealand for the purposes of the relevant treaty. The residency test, contained in the OECD model treaty,¹⁷ is that an entity is resident in a country if it is ‘liable to tax’ in that country by reason of residence, domicile or other grounds. New Zealand has adopted the OECD model treaty as the basis for negotiating its own treaties, so most New Zealand treaties contain this or a similar form of test. There is considerable legal debate as to the application of the various treaty tests to a trust, trustee or beneficiary and it is necessary to consider the exact terms of the relevant treaty and domestic laws of both countries.

If a foreign trust qualifies as resident under a treaty it is often able to obtain considerable benefits. For example, a number of New Zealand’s treaties prevent the proceeds of alienation of property from being taxed in both jurisdictions. Where a New Zealand foreign trust disposes of eligible property in the UK, the capital gain on the sale will not be subject to tax in the UK. The capital gain will also not be subject to New Zealand tax as New Zealand generally does not tax capital gains and New Zealand would not tax the trustee as the gains would be considered foreign sourced income of a foreign trust.

The New Zealand government has entered into tax treaties with the following countries:

Exit Strategy — ‘Redomiciliation’ of Trusts

Although New Zealand’s statutory law does not specifically provide for redomiciliation of trusts, there is common law support for redomiciliation provided this is by way of resettlement. In addition, there is provision in the New Zealand Companies Act 1993 for a PTC to redomicile to another jurisdiction.¹⁸

Regulatory Legislation

Money laundering prevention

The Financial Transactions Reporting Act 1996 (‘FTRA’) aims to prevent and detect money laundering by imposing obligations on financial institutions to verify the identity of persons conducting transactions and to report suspicious transactions. The FTRA is intended to satisfy New Zealand’s international obligations to combat money laundering and to assist in the enforcement of the New Zealand Proceeds of Crime Act 1991.

A financial institution (which term includes a trustee),¹⁹ is obligated to report to the New Zealand police as soon as practicable, if it has reasonable grounds to suspect that a transaction or proposed transaction to be conducted through it is or may be relevant to the investigation or prosecution of any person for a money laundering offence.²⁰

The FTRA also requires a financial institution to verify the identity of facility holders,²¹ and keep such records of each transaction conducted through it as are reasonably necessary to enable the Commissioner of Police to readily reconstruct the transaction at any time.²²

Failures to comply with the obligations under the FTRA are offences carrying large penalties, including imprisonment.

Mutual assistance in criminal matters

The Mutual Assistance in Criminal Matters Act 1992 allows assistance in criminal investigations and proceedings to be given to other countries. The range of assistance includes taking evidence and enforcing orders relating to the proceeds of crime.

Counter terrorism

The Terrorism Suppression Act was passed in October 2002, and deals specifically with terrorist attacks using explosive devices, the financing of terrorist attacks, participation in terrorist groups, as well as those who raise funds for terrorism.

The Counter Terrorism Bill follows on from the Terrorism Suppression Act. It creates new terrorism related offences, and gives police and customs officers new powers to investigate and prosecute those offences. The Bill enables New Zealand to ratify the final two of the 12 United Nations conventions on terrorism.

Monique Bhullar
New Zealand Trust & Investment Corporation Ltd
E-mail: info@newzealandtrustcorp.com

Endnotes