CONTEXT
Family trusts are a cornerstone of succession planning and asset protection for high-net-worth families in New Zealand. A common scenario is for a trust established by a high-net-worth couple to make significant distributions to adult children (who are also beneficiaries of the trust) to assist the children with expenses, such as purchasing a first home.
As a result of increased global mobility and many younger New Zealanders pursuing opportunities abroad (particularly in Australia), there are now many New Zealand family trusts whose beneficiaries include people living overseas.
This change in New Zealand society presents a further challenge for trustees in addition to their already hefty workload – overseas taxes.
OVERSEAS TAX TREATMENT OF DISTRIBUTIONS IS OFTEN LESS PERMISSIVE THAN NEW ZEALAND
New Zealand’s tax treatment of “complying trusts” (very broadly, trusts with New Zealand settlors and that are fully compliant with New Zealand tax law) is relatively permissive.
Income of the trust is either taxed in the hands of the trustee, or a beneficiary if distributed to or vested absolutely in interest in the beneficiary within the statutory time limit. All other distributions by such trusts, including retained earnings and capital gains are tax-free in New Zealand. This could be seen as a reflection of New Zealand’s general approach to the taxation of capital gains, which is generally not to tax such gains. Distributions by complying trusts of capital gains to New Zealand resident beneficiaries and overseas resident beneficiaries are treated the same.
Not all countries treat distributions by a trust in this way. For example, in the case of a New Zealand family trust that makes a distribution of capital to an Australian resident beneficiary, Australia will usually impose tax on that distribution. A similar tax treatment applies to a New Zealand family trust that makes a capital distribution to a UK resident beneficiary; the UK will typically impose capital gains tax on such a distribution.
TRUSTEE RESPONSIBILITIES WHEN DEALING WITH OVERSEAS BENEFICIARIES
Trustees have a duty to act prudently when making decisions about distributions. If funds are passed to beneficiaries overseas without proper consideration of the tax treatment in that country, the outcome can be less than straightforward. While there are remedies available if an overseas tax problem arises, these can be complicated to access (including the need to apply to a Court in some cases). Attempting to correct an error using available mechanisms under New Zealand trust law also relies on the overseas tax authority accepting that the correction applies for the purposes of their local tax law.
PRACTICAL TIPS FOR TRUSTEES
As the old saying goes, “an ounce of prevention is worth a pound of cure”. Here are some practical tips for trustees that may assist in preventing tax issues from arising when making distributions to overseas beneficiaries:
• Be proactive: Trustees should take note of where beneficiaries are living and be alert to potential overseas tax issues if there are beneficiaries living abroad.
• Don’t assume “she’ll be right”: Trustees should not assume that simply because a distribution is tax-free in New Zealand this will mean it can be received tax-free overseas.
• Seek overseas tax advice first: Before making distributions to beneficiaries living abroad, trustees should obtain advice on the overseas tax consequences. Solutions to mitigate overseas tax may be available.
FINAL THOUGHTS
For trustees, the key takeaway is simple: when beneficiaries live overseas, distributions from New Zealand family trusts can trigger unexpected foreign tax liabilities. The rules in Australia and the UK are examples, but similar risks may apply in other countries and territories.
Before making any capital distribution, trustees should seek tax advice in the beneficiary’s country of residence to avoid creating costly problems for beneficiaries and exposing themselves to risk.
Jackson Russell regularly works with advisers who are experienced in overseas tax matters (including Australian and UK tax issues) and would be pleased to assist you in navigating the foreign tax implications for your family trust.
