The Inland Revenue (IR) has confirmed NZ trusts can have a dual classification for tax purposes, as both a complying trust and a foreign trust.
This comes as IR have finalised their updated Interpretation Statement on the Taxation of Trusts.
It’s not an unusual situation to have a dual trust. For example, NZ’ers who are non resident may wish to get a foot on the NZ property ladder and if they acquire a NZ property in a NZ discretionary trust, such a trust will be a dual trust for tax purposes.
IR have also confirmed that dual trusts will still have to comply with the disclosure requirements for foreign trusts.
The foreign trust disclosure rules require the provision of a fair amount of information about settlors, trustees and beneficiaries. They impose ongoing maintenance requirements, as information changes, and annual returns are required detailing settlements and distributions made during the year. Combined with the information required under the AML/CFT rules, it is expected that costs in this area will increase.
IR confirm there is a deferral period available of 48 months where disclosure is not required, but only if all of the trustees are non professional trustees and have not been trustees of foreign trusts before.
Failing to comply with the registration and on-going disclosure requirements would mean that the foreign trust will cease to be eligible for an exemption from tax on its foreign-sourced income under ss CW 54 and HC 26.
Other penalties for non compliance can be harsh. If a settlor or trustee knowingly does not provide information about a trust or knowingly does not keep proper records, a penalty can be imposed on them under s 143A of the TAA. The penalty is a fine of up to $50,000 for knowingly providing false information or knowingly not disclosing or imprisonment for up to 5 years or both. A person who aids, abets or incites either of these offences is liable to the same fine or term of imprisonment
Can an election be made for the trust to be solely a complying trust? It appears so. The definition of complying trust has been amended to allow a settlor or trustee to make an election under section HC 33 for the trust to be a complying trust. It is a bit unclear whether this will take away the foreign trust disclosure requirement, but the IR Interpretation statement seems to suggest so. Hopefully IR will clarify this point as surely if only NZ assets are to be held the settlors would readily elect so they don’t have to comply with the foreign trust disclosure rules.