New bill promises migrant tax holidays and heavy reporting requirements for foreign trusts

Paul Kilford, Solicitor | July 2005

A new tax bill offers a "tax holiday" for immigrants and returning New Zealanders, but also imposes tough new recordkeeping requirements on New Zealand trustees of foreign trusts.

The recently released Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Bill (the Bill) contains many of the much touted changes to the fringe benefit and depreciation regimes.

This newsletter focuses on two other important changes:

•  An effective "tax holiday", for some returning residents and new migrants, on income from certain overseas investments;

•  A new reporting and disclosure regime for New Zealand trustees of foreign trusts.

Tax holiday for immigrants

This change has been introduced to counter what the Government sees as an impediment to recruiting skilled migrants. 

As New Zealand residents are taxed on their worldwide income, highly-skilled new migrants are likely to negotiate this increased tax burden into any New Zealand remuneration package – effectively passing the tax cost onto the employer.

The change exempts "certified residents" from New Zealand income tax on income from:

• controlled foreign companies;
  
  
• foreign investment funds;
  
  
• financial arrangements (accruals income) for foreign financial arrangements;
  
  
• exercising a foreign employee share option.

Also, migrants will no longer need to pay non-resident withholding tax on interest paid on foreign mortgages.

The Income Tax Act will also extend the period by which trusts settled by a certified resident can elect to become tax-compliant "qualifying trusts".

What’s the impact?

Most income derived by certified residents will be exempt from income tax, except for:

• employment income;
  
  
• dividends;
  
  
• interest;
  
  
• business income relating to the supply of services. 

Residence certificates

A key element of the new regime is the need to obtain a “residency certificate” from the Inland Revenue Department. 

There are two types of residency certificates, and a person can only hold either certificate once in their lifetime.

General resident certificate

A "general resident certificate" is available to all new migrants and any returning New Zealanders who have been out of the country for at least ten years.  The holder of this certificate is eligible for the tax holiday for three years.

Employed resident certificate

The Bill also proposes an "employed resident certificate" for more skilled migrants and returning residents (again, returning New Zealand residents who have been away for more than ten years).  The holder of an employed resident certificate is eligible for the tax holiday for five years. 

To qualify for an employed resident certificate, the person must for the year that the certificate is valid:

• derive a "source deduction payment", generally salary or wages from employment will satisfy this criteria (but there are some exceptions to the "source deduction payment" requirement); and
  
  
• be engaged in full-time employment (calculated on a 37.5 hour working week) for at least 94% of the year.  However, if the person works part-time but earns more than $70,000 pro rata in the year, they will still be eligible for the certificate.

An important qualification to the new regime is that the migrant cannot be "associated" with their employer.

Inland Revenue can also issue a "dependent resident certificate" to people under 20 years of age who are financially dependent on the migrant, which provides the dependent with the same concessions.

Disclosure regime for foreign trusts

The New Zealand Government has long been under pressure from Australia to introduce recordkeeping requirements for New Zealand resident trustees of foreign trusts. 

The Bill introduces the details of these new requirements. 

Every New Zealand resident trustee will need to disclose the following information to the Commissioner of Inland Revenue:

• The name and date of settlement of the trust;
  
  
• The name and details of the New Zealand resident trustee;
  
  
• Whether a settlor of the trust is an Australian resident;
  
  
• The name of the approved organisation to which the trustee belongs.

Records to be kept

The New Zealand resident trustee of a foreign trust will also need to maintain financial records in New Zealand for at least seven years, recording: 

• The deed of trust;
  
  
• Details of settlements and distributions from the trust;
  
  
• The name and address of the settlor or recipient of the distribution;
  
  
• The assets and liabilities of the trust;
  
  
• All sums received and expended by the trustee;
  
  
• The accounting system used in each income year in the administration of the trust.

Trustee must belong to "approved organisation"

If the New Zealand resident trustee of a foreign trusts is a natural person, they must belong to an "approved organisation". 

If the trustee is other than a natural person, a director or manager of the trustee must be a member of an "approved organisation". 

To be an "approved organisation":

• The organisation must be approved by the Commissioner of Inland Revenue;
  
  
• Its members must be subject to a code of conduct and disciplinary process;
  
  
• Its members must typically provide trustee services.

If the trustee fails to take remedial steps within 30 days of receiving an Inland Revenue notice that they have breached these provisions, New Zealand can tax the worldwide income of the trust.

Potential scope of rules

Given the extent of these rules, the "approved organisation" requirement is too narrow.

If a person is a trustee of a foreign trust (even a trustee of a foreign relative’s estate) and they receive notice from Inland Revenue that they are not a member of an "approved organisation", New Zealand can tax the worldwide income of the trust even though none of the trust assets are in New Zealand. 

In our view, the executor of an estate or a person appointed as trustee of a foreign family trust, should not be subject to such heavy-handed penalties. 

Enactment of the Bill

The Bill has been referred to the Finance and Expenditure Select Committee and the committee’s report is not expected until mid-August.  Of course, by this time, we will either have just had, or will be about to have, a general election.

As a result, the timing of the enactment of the Bill and its final form are impossible to predict.

However, as the tax holiday is concessionary and the reporting requirements for trusts have already been the subject of a lengthy consultation process, it seems unlikely that either of these two initiatives would be removed from the Bill after the election, even in the event of a change of government.

Advice and information

For further advice or information on tax issues, please contact any member of Bell Gully’s tax team listed below.

 

Auckland

Niels Campbell
Partner

David Simcock
Partner

Willy Sussman
Partner

John Bassett
Senior Associate

Graeme Olding
Senior Associate

Monique Mackie
Senior Solicitor