NZ Trust deemed Australian?

My gut feeling would be that you should consider a NZ incorporated company as trustee.

GreatPig

Just to add in a few things…

Again, just taking a stab in the dark here, but I would assume that Aussie trust laws are similar to NZ trust laws. Apparently trust laws all originated from English estate laws.

So I would assume that they both have a similar structure – someone correct me if I am wrong. In Australia, if net income is left in a trust and hasn’t been distributed out (no one is “presently entitled” to it) then it can be taxed at the highest marginal rates under Section 99A.

Does anyone know if there is a 99A equivalent in NZ?

Yeah…this is where a NZ accountant’s advice would be handy.

Cheers,
Andrew.

GP,

Sorry I forgot to mention that generally, any Australian accountant worth his salt would ensure that everything is distributed.

From what I know so far, everything is normally distributed to a ‘bucket company’ which can then be taxed at the corporate rate, so that 99A doesn’t apply.

In that case, technically its been distributed out of the trust & taxed. So effectively its the same as NZ I guess…

The point I wanted to make is that net income has to be distributed out each year. I dont think there is anything stopping you from putting the taxed amounts back into the trust…

I thought you were inferring that you could keep funds in a trust and not have them taxed at all…

Its all good

Cheers,
Andrew.

Hi,

In answer to GP, there are some differences in NZ trust law compared to other jursidictions, the main difference being that the tax residence of NZ Trusts depends on that of the settlor, whereas other trust jurisdictions depend on that of the trustees.

Where the trustee does not distribute all of the net income of the Trust, the trustee pays tax at 33% on the undistributed net income.

My advice to the first forum contributors, who wish to save on compliance costs, is not to act as trustees in their own names but to set up a NZ trustee company with them as directors – let the NZ lawyer be the shareholder to save on auditing the Accounts.

Where the trustees of the NZ Trust are Australian residents, the ATO will deem the Trust to be an Australian Trust – so change it before lodging the tax return of the Trust.

Even though you will be directors of the trustee company, you can still contend that the Trust is being controlled and administered from NZ – the lawyer has power-of-attorney, maintains the minutes, lodges tax returns, etc.

Thr trust transferor rules only apply where property is transferred into the Trust for less than its market value. This happens with transferring the family home into a Trust, but does not happen with rental properties purchased as investments. Deposits paid by the trustees are recorded as loans, so there is no ‘transfer for less than full consideration’.

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Chris,

Here’s the exact wording of that part of the transferor trust provisions:

So unless there’s been an update to those rules recently, the less than market consideration clause only applies to non-discretionary trusts.

Also, what the provisions say about trust control:

and:

Note the generality of their definition of control, and also that it applies to associates of the taxpayer as well as the taxpayer him/herself. Then there’s more than a page of definitions about what an associate is, enough to cover pretty much everyone.

GP

Hi GP,

I know that we have had this debate or discussion going on for awhile.

Can I ask you if you have contacted the ATO about what is a transfer and what is a purchase? Have you put different scenarios to them for clarification?

When a Trust purchases property, it is not a transfer. When an already owned property is sold to a Trust, there is the potential for the transaction to be classified as a transfer, especially where it is sold to the Trust for less than its full market value or for consideration less than an arm’s length amount.

A Trust established to purchase rental properties as investments is unlikely to come under the trust transferor rules, as it is engaged in a business activity, namely investment, and is acting on an arm’s length basis with all parties.

I strongly recommend that you call the ATO yourself or have your Australian tax agent call the ATO Advisings on this issue.

Whenever I am not sure about something that I have read, I seek clarification from IRD. When I was a CPA in Australia, I did the same with the ATO.

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Hi GP,

I am no longer operating in Australia as a tax agent, so I do not have standing with the ATO.

When I have these kinds of questions, I relay them through associated accountants in Australia, and they obtain the information or opinions requested.

That is so in this case. Private rulings have not been applied for. The ATO record on private rulings is not good. Even when they do belatedly provide private rulings, they have seen fit to reneg on them.

My reference to a business activity was to paraphrase the section you had quoted from the transferor trust rules. We are talking about business dealings and doing them at arms length. And it is where the business dealings are done at arms length that the transferor rules are said not to apply.

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Hi,

You might like to read the legal article in this link for an example of who a transferor is http://www.findlaw.com/12international/countries/nz/articles/2224.html

Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz

Just an update after having had a long discussion with someone from the ATO’s foreign section. I have to say though that the person concerned wasn’t right up with these rules himself, and actually stated that this was the first query they’d had on this topic for a couple of years. For much of the discussion he was reading and interpreting the tax act as we went.

However, the primary points were:

If the trustee was at any time resident in Australia, or the trust was at any time controlled by an Australian resident, then the trust would be deemed Australian resident for tax purposes.

If the trust was considered a non-resident trust for tax purposes, then the transferor trust rules would apply except for specific exemptions. In relation to that:

– Lending money to the trust (for deposits) would be considered a transfer of services.

– Paying off a loan to a bank, where the loan was used to purchase property in the trust, would also be considered a transfer of services (assuming loan repayments were coming from the Australian resident and not entirely covered by trust income).

– Lending money to the trust, even at commercial interest rates, would not be considered a transaction in the normal course of business, as the individual would not be in the business of lending money (which is a regulated activity in Australia).

– One thing he seemed particularly vague on was whether the investing itself would be considered a business. He seemed to think that if the trust had enough properties then it might be considered in the business of property investment. However, how that would affect the previous point about lending money to that trust, I don’t know. That also raises questions with the definition I quoted earlier about eligible business transactions, where that rule seems to require having other customers or clients for a transaction to be considered eligible.

– Irrespective of being considered a transferor, if all income and gains were distributed to non-resident (of Australia) beneficiaries, then there’d be no attributable income. Thus if capital gains could be distributed to NZ beneficiaries then they would not be counted as attributable income.

– The last point however doesn’t really matter, as even if the property was owned in an Australian resident trust, if all income and gains from the property were distributed to non-residents, then they would also not be taxed in Australia. There are special rules about foreign-sourced income being distributed to non-residents. The only real difference is that the Australian trust would have to file a tax return in Australia whereas a NZ non-resident trust may not have to (if it didn’t souce any income from Australia).

– In relation to an Australian resident controlling a non-resident discretionary trust, his interpretation of that seemed to be much the same as mine. If the Australian resident or his associates appeared to have any influence at all over the trustees, (s)he would be deemed to have control. Associates explicity includes other family members, and would almost certainly include non-residents with whom they’d had business dealings in relation to the trust (accountants, lawyers, etc).

In the end though, the onus of proof with any of this stuff would be on the taxpayer. The ATO could simply state the rules apply and it would be up to the taxpayer to put forward a convincing argument that they don’t. If the ATO weren’t convinced, I guess it would ultimately only leave arguing it out in court.

The information provided by this person from the ATO was only for informational purposes and is not binding or advice or any kind. Given how vague he appeared on some of the issues, I’m not sure that his interpretation is any more meaningful than anybody elses. Consequently, I think professional legal advice would still be necessary, rather than relying on anything stated here.

Cheers,
GP