Increasing number of people from all over the world are attracted to New Zealand, which offers political stability, in addition to a number of other advantages.
These benefits include shifting assets to a favourable tax jurisdiction, investing in a balanced economy and a clean, green and safe environment.
Moving to New Zealand with your family and your wealth would however pose complexities and planning opportunities.
The use of Trusts as an asset protection tool is commonplace in New Zealand to hold assets on behalf of families, as they offer several advantages including protection from means and asset testing, estate and succession planning and the attendant tax benefits.
New Zealand Trusts, with their compliance and administration costs, can be difficult to understand.
The country operates complex trust tax laws, which centre on the residence of the trust settlor and beneficiaries.
A taxpayer’s residency can be backdated by up to six months, if the taxpayer has visited New Zealand before coming to live here.
New Zealand’s residency rules state that a person is resident in New Zealand from the commencement of any period of twelve months if they are present for 183 days in that 12-month period.
Hence, any decision to the formation of a pre-migration Trust should be carefully planned and executed.
Trust Classification
There are three tax classifications of Trusts (Complying Trusts, Foreign Trusts, and Non-Complying Trusts) with different tax rates and treatments applying to each category.
The settler of a Foreign Trust before becoming a New Zealand resident has to elect to make it a Complying Trust. In the absence of such a choice, the Trust would be treated as a Non-Complying Trust and all distributions from the Trust of income (not being beneficiary income) and capital gains to New Zealand residents will be taxed at a flat rate of 45%.
As New Zealand taxes trusts essentially based on the residency of a Settlor, a Non-Resident can form a Trust with New Zealand Trustees and that Trust will not be subject to tax in New Zealand on any foreign-sourced income.
This obviously offers a significant tax planning opportunity to non-residents living in a jurisdiction whose tax rules tax income from offshore trusts only on a remittance basis or where one or more trustees are resident in the local jurisdiction.
Pre-Migration Trust
A tax saving opportunity exists for migrants or for those New Zealanders returning to this country from overseas, absent from New Zealand in excess of 10 years.
New Zealand offers a four-year exemption on the taxation of all foreign source income of first-time migrants and returning New Zealand residents who have been non-resident for at least a continuous period of 10 years prior to return.
This opportunity can be exploited through a Pre-migration Trust.
A Pre-Migration Trust is a Foreign Trust that could be set up before anyone or their family moves to New Zealand.
This Trust should have a Trustee who is resident in New Zealand.
This will ensure that many of the overseas jurisdictions, which tax the income of the Trust based on residence of Trustee, will not attempt to tax the income of the Trust, which has a New Zealand Trustee.
Thus, the Trust will not be liable for overseas tax on its overseas income.
It will not be liable for New Zealand Tax as foreign income of the Foreign Trust is not taxable in New Zealand.
Tax-Free Trust
Thus, the result will be that the Trust will be totally tax free, for four years for migrants and New Zealanders returning home after 10 years.
Potential migrants must transfer substantial income producing assets to such a Pre-migration Trusts prior to migration.
Income sourced from such investments will not be taxed for four years after the settler migrates to New Zealand.
The settlers of such Pre-Migration Trusts have to elect within a period of four years to treat the Trust as a Complying Trust. Until such a choice is made, income accruing to this Foreign Trust will not be taxed in New Zealand.
It is wise to have a pre-migration Trust with these assets transferred to Trust, from the point of view of asset security as well.
Although Gift Duty is being abolished in New Zealand after October 2011, there would be no requirement to gift these assets to the Trust.
Funds can be transferred to a bank Account opened in New Zealand which can be subsequently used to purchase property or establish any kind of business in New Zealand.
Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz), Level 1, 208 Great south Road, Papatoetoe, Auckland 2025. He can be contacted on (09) 2792987. The above article should be considered only as a guideline and not a specific advice. Mr Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
