The upshot is that if income is earned overseas by a non-resident, then New Zealand is simply not interested in taxing it.
Under New Zealand tax law, trusts are divided into three groups: complying trusts, non-complying trusts, and foreign trusts. We tax each of them based on where the settlor lives. The settlor is the person or entity putting property into the trust. This rule was introduced in 1988 to stop New Zealanders from squirrelling assets away in trusts overseas. Even if the assets, beneficiaries and trustees are overseas, if the settlor is based here, we tax the trust.
The rules for designating an entity as a foreign trust are complicated and based on when property was settled in the trust, when income was earned, and when distributions are made. It is possible for a trust to change status. However, in practice, foreign trusts tend to remain foreign trusts. Their settlors, beneficiaries and assets are overseas. And because all the income is earned by non-residents, and outside New Zealand, we're not interested in taxing them.
The real problem is our mismatch with other countries. Most other countries tax trusts based on where the trustee lives. From the other country's point of view, even if the settlor and the beneficiaries and all the assets are based in their own country, but the trustee is based overseas, then the trust itself is not taxed.
That's the loophole. New Zealand taxes trusts based on settlors, so foreign trusts with only a trustee based in New Zealand don't get taxed here. If they are set up right, New Zealand's foreign trusts can escape tax everywhere. That's the "high-quality jurisdiction for trusts with a benign tax system in certain circumstances" that we provide.
But we never set out to create this effect. All we tried to do was make sure that we had a consistent set of rules for trusts and other taxpayers. We didn't set out to create a tax haven. But, in practice, our tax system does allow people to avoid tax.
Having "foreign trusts" as part of our tax rules is probably necessary. We need to have some way of differentiating between trusts that we are entitled to tax, and trusts that we shouldn't be taxing. Think of a trust that has been set up in say, the UK, but then the trustee moves to New Zealand. Even though the trustee is now here we shouldn't be taxing that trust, based on our principles for which income we think we're entitled to tax.
Are the foreign trust rules a tax haven? That probably depends on what you think a tax haven is. If you think that a tax haven is a country that explicitly sets out to create a benign tax system and enable people to hide assets and minimise taxation, then no, we're not a tax haven. But if you think intent doesn't matter and what really counts is the way the tax system and secrecy rules operate to allow people to avoid and evade tax, then we are a tax haven.
For those who doubt that we are a tax haven, what other explanation is there for NZ firms marketing New Zealand as a great place to pay no tax and be confidential about it?
Foreign trusts depend on secrecy. Although trustees here are required to keep records, they are not required to proactively file information with Inland Revenue (IRD). The only information the IRD collects is the name of the trust and the name of the trustee.
There's one exception to this secrecy. the IRD collects information about whether there is an Australian resident settlor and who those settlors are, and it discloses this to the Australian Taxation Office (ATO). That means the ATO has enough information to pursue people who ought to be paying tax in Australia.
The Australian example provides the solution to the tax haven issue. Disclosure. At a minimum, we should be doing exactly what we do for Australia: Collecting names of settlors and beneficiaries, and disclosing them to authorities elsewhere. That would shut our foreign trusts tax haven down immediately.
- Dr Deborah Russell is a senior lecturer in taxation at Massey University. She was the Labour candidate for Rangitikei in 2014.
- Views expressed here are the writer's opinion and not the newspaper's. Email: editor@hbtoday.co.nz
