The landscape for establishing and maintaining Trusts is starkly different compared to a few years ago.
Generally speaking, the potential reasons for having a Trust structure remain consistent, in terms of asset protection, estate planning, and tax efficiency. However, the additional obligations in terms of reporting and disclosure, among others, and the cost associated with the extent of consequent risk, is sound reason to think more profoundly about whether current or potential new Trust structures are appropriate for your circumstances.
As to reporting, unlike before, Trustees of Trusts must now satisfy obligations under the Anti-Money Laundering and Counter Financing of Terrorism Act 2009 (AML/CFT Act), Common Reporting Standard (CRS), and, if applicable, the New Zealand Foreign Trust Disclosure Regime.
As to disclosure and other obligations, from January 2021, the Trust Act 2019 imposed new requirements on Trustees. The new rules garnered significant media coverage and led to inquiries and reviews by clients about their asset planning arrangements.
In April 2021, the Taxation (Income Tax Rate and Other Amendments) Act 2020 came into force. This Act directly affects “active” Trusts; Trusts that generate income. Section 59BA of this Act attempts to curb avoidance of the highest 39% personal income tax rate. This provision obligates trustees to file an annual return that includes Statements of Financial Performance, Statements of Financial Position, and additional information specified by the IRD, which could include transfers to the trust by associated persons, loans from or to related parties, and distributions and settlements made during the income year.
For trustees, the consequence of these changes includes potentially higher compliance costs and possible unnoticed disclosure of Trust information with other countries under tax information exchange agreements that New Zealand is party to. As lawyers, we are increasingly working with tax specialists to assess the potential implications of particular Trust structures on foreign resident trustees or beneficiaries, whether for now or in the future when a foreign beneficiary might receive a capital distribution from a family or investment Trust.
Furthermore, as alluded to above, CRS applies to Trusts. The CRS is a multi-country arrangement led by the Organisation for Economic Co-operation and Development (OECD) to counter tax evasion. Under the CRS, information about foreign tax residents with investments outside the domestic tax residence is automatically shared between approximately 100 countries. It is commonplace for trustees to need to complete self-certification forms for a bank where Trust funds are invested. These forms require a trustee to state details of the countries in which they pay tax and provide an individual tax number held in each of those countries (if any).
As obligations relating to Trusts continue to develop and intensify, we stand ready to advise and assist clients to ensure they have the most appropriate structure in place for asset protection and succession planning.
Co-written by Lucy Young and Bhavin Parshottam
This article is current at the date of publication. It is intended to provide general comments only about legislation. Lewis Lawyers accept no responsibility due to reliance by any person or organisation on the content of this article. Please contact the author of this article if you require specific advice about how this applies to you and your circumstances.