New Zealand – Recent Developments 2020

Some participants in the foreign trust sector lobbied against the changes, suggesting instead that this would create a duplication of obligations under the Common Reporting Standard (CRS) reporting requirements – and any concerns about a lack of transparency concerning New Zealand foreign trusts could be dealt with by deeming foreign trusts to be financial institutions to ensure that they are captured by CRS reporting.

Those submissions fell on deaf ears and as a result we have the domestic regime operating potentially in tandem with CRS.

I had previously canvassed in an IFC article the basic obligations arising for foreign trust registration and annual reporting. Whilst some elements of the domestic regime are more onerous than CRS, the counterpoint is that the domestic regime does not involve automatic reporting or exchange of information with any other tax jurisdiction. Rather, the purpose of the regime is to ensure that foreign trusts are reported to the New Zealand Inland Revenue Department (IRD) in order to ensure that the tax exemption is retained. With the provision of basic information concerning the trust, this means that if an information request is received by the IRD in relation to a foreign trust, the IRD will have sufficient basic information to make further enquiries as required in order to discharge New Zealand’s international information exchange obligations.

Whilst the introduction of this regime caused some limited attrition in the use of New Zealand foreign trusts, in the writer’s experience, this was not particularly extensive, particularly given that international clients were having to accept that with CRS and other reporting obligations (not to mention the impending introduction of beneficial ownership registers for companies), a degree of international transparency was inevitable.

Moreover, New Zealand IRD take a very responsible approach in relation to the administration of the foreign trust database, and do not exchange information without proper consideration of the appropriateness of an information request. The information on the foreign trust database is segregated from that which is collected for the purposes of the CRS regime.

Some New Zealand foreign trusts – whilst having domestic reporting obligations under the foreign trust regime – may not be reportable under the CRS regime (and hence there may be no automatic exchange of information) if the trustee and trusts are not categorised as financial institutions for CRS purposes.

It is also feasible to design trusts in a way that provides some boundaries to the extent of information which may have to be reported under the domestic regime.
However, the overriding factor in the modern world is that confidentiality is not a given and an element of transparency, or the potential for transparency via exchange of information, is something that clients must accept.

Annual returns – NZ foreign trust and CRS

The annual return process under the domestic foreign trust regime is relatively straightforward, with filing of details of distributions and settlements, a basic set of financial statements, and payment of an NZD $50 fee.

In the experience of many trustees, CRS reporting for foreign trusts is more painful than the domestic reporting obligation, at least insofar as the initial set up of the reporting financial institution on the IRD platform. However, once this hurdle has been overcome the annual CRS reporting is not too burdensome, other than the ever-present challenges of interpreting the requirements of the CRS regime, which can result in quite divergent approaches amongst legal advisers and financial institutions.

The Base Erosion and Profit Shifting Initiative

New Zealand has subscribed to the OECD Base Erosion and Profit Shifting (BEPS) initiative. There were some early discussions as to whether or not foreign trusts might be captured to some extent by the reverse hybrid classification under BEPS. This involved (in the writer’s opinion) a rather contorted interpretation of the BEPS rules which essentially requires the application of corporate concepts to a trust in order to classify it as a reverse hybrid.

The reverse hybrid concept (like BEPS as a whole) was targeted at corporate tax planning, particularly in relation to things such as fiscally transparent companies and fiscally transparent partnerships. The attempt to apply this to trusts where there are: no “owners”; discretions as to the allocation of income from year to year; and a possibility of accumulation of income for a period of years which is subsequently distributed – meant that the application of the reverse hybrid concept to foreign trusts could result in double taxation outcomes.

Given that the reverse hybrid concept was targeted at mischiefs such as claiming of double deductions, or deduction in one jurisdiction not matched by taxability in another jurisdiction, it is not surprising that OECD takes the view that the triggering of a double taxation outcome is undesirable. The domestic New Zealand BEPS legislation does not capture foreign trusts within the reverse hybrid category.

Trust Resettlements

The tax exemption for New Zealand foreign trusts relies upon the trusts having no New Zealand resident settlors. One issue which caused some challenges in the recent past is determining whether or not a trust resettlement (decanting) might compromise the exemption, if the existing New Zealand trust was regarded as a settlor of the recipient (resettled) trust. Logically, this should not have been the case given that the real settlor was the original contributor to the first trust, and there was no coherent economic or logical reason why the tax exemption should be lost simply because these assets passed through the first trust to a second trust. However, the matter was not without doubt even though there were very strong technical arguments supporting the approach that one should disregard the “conduit” trust which passed assets onto a second New Zealand trust.

The good news is that IRD has recognised that triggering a tax liability for a recipient trust merely because assets were resettled from another New Zealand foreign trust is not within the scheme and purpose of our tax legislation. As a result, amendments to the Income Tax Act have been made which make it clear that one should look through the intermediate trust to the original settlors.

Therefore, any anxieties concerning trust resettlements have now been relieved, and there is no need to look at alternative mechanisms to achieve the desired outcome of maintaining a tax exemption, as the purported status of the intermediate trust as a settlor of the recipient trust is now disregarded.

Multilateral Convention on Mutual Administrative Assistance in Tax Matters

New Zealand is a signatory to the Multilateral Convention, like most jurisdictions around the globe. The list of reportable jurisdictions which New Zealand has agreed to exchange with comprises 90 countries. A number of participating countries are not on this list, but there are still some on the reportable list which might cause some concerns in terms of the potential for misuse of information exchanged. Our IRD relied heavily on the OECD Global Forum determination of acceptable jurisdictions for exchange.

Nevertheless, our IRD has made it clear informally to advisers that it will take a very conservative approach to exchange of information (as it has done in the past under specific double tax agreements) if there is any concern regarding the validity or underlying purpose of the information request. The key personnel involved with this process in IRD are highly skilled and experienced professionals who understand the importance and gravity of exchange of information and will apply due rigour to specific information requests.

Trust Law Reform

The Trusts Act 2019 was enacted on 30 July 2019. The Act comes into effect on 30 January 2021 and will apply to all New Zealand express trusts including charitable trusts.
The law reform process was highly consultative, and many changes were made to early iterations of draft legislation. The legislation, as enacted, may not be perfect but for most purposes brings New Zealand law into a much more modern style given that the prior Trustee Act is over 60 years old.

It is beyond the scope of this brief article to consider all the reforms contained within the new Act; however, the following are worth noting:

• Extension of maximum trust duration from 80 years to 125 years;
• An attempt (in the writer’s opinion) at the codification of the principles found in Schmidt v Rosewood Trust Ltd [2003] 2 AC 709 which was followed in New Zealand.

This is the single item which has raised the most eyebrows in New Zealand, and perhaps overseas, as the Act does set out quite detailed provisions concerning the requirements to provide basic information and possibly more extensive information to many if not all beneficiaries. Whilst at first sight these obligations appear onerous, there are, in fact, opportunities within the scope of the legislation to narrow the provision of information to a subset of the class of beneficiaries. In essence, we end up back in the classical position that trustees cannot operate in a vacuum and there must be at least some beneficiaries given information to ensure that the trustees are discharging their obligations.

• The Act also sets out several so-called mandatory and default trustee duties. The former cannot be contracted out of; the latter may be modified by express wording in the trust deed. Bedrock obligations, such as the duty to act in accordance with the terms of the trust, and the duty to act honestly and in good faith, are, not surprisingly, mandatory duties.

• One important point is the statutory “override” of Armitage v Nurse [1997] 3 WLR 1046, which supported the capacity for a trust instrument to exclude liability except for dishonesty, wilful misconduct, or recklessness. Under the Act, one cannot exclude liability for gross negligence.

• Paid advisers are required to alert the settlor to any liability exclusion or indemnity clause and to ensure that the settlor understands the meaning and effect of the clause.

John Hart
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.