New Zealand: NZ Tax Update - May 2006 - Income Tax Changes of Interest to Non-Residents

Last Updated: 5 June 2006
Article by Lynette Smith

This update comments on two areas of recent change in New Zealand’s income tax law, which will be of interest to nonresidents of New Zealand:

  • the introduction of new exemptions from income tax for 'transitional residents'; and
  • the introduction of disclosure requirements for foreign trusts.

The changes were contained in the Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Act 2006 (the Amendment Act), which received royal assent in April 2006. It is a lengthy document and makes amendment to the Income Tax Act 2004 (the 2004 Act) and the Tax Administration Act 1994 (the TAA), in particular.

Transitional residents

The introduction of the ‘transitional residents’ concept is designed to make New Zealand more attractive to skilled migrants. The Amendment Act in essence introduces certain exemptions from income tax for new residents to New Zealand and returning residents to New Zealand. It does this by the inclusion of sections FC 22 to FC 24 to the 2004 Act (Subpart F deals with apportionment and recharacterised transactions).

The new sections introduce a concept of ‘transitional residents’. The underlying idea is that a transitional resident is treated as being a non-resident in relation to foreign sourced amounts that the person derives. The result of having foreign sourced income treated as being derived by non-resident means that such amounts will not be subject to income tax in New Zealand in the hands of the transitional resident.

The requirements for being a transitional resident are that:

  • the person has a permanent place of abode in New Zealand; and
  • immediately before acquiring that permanent place of abode the person was continuously non-resident for at least 10 years (non-residence period); and
  • the person was not a transitional resident before that non-residence period.

Given the requirements relating to a permanent place of abode, by implication, a transitional resident must be a natural person. A company could not be a transitional resident.

The transitional resident status will last for a four year period ending the last day of the 48th month after the month in which the person (re-)acquires a permanent place of abode in New Zealand. Following the expiry of this period, the person is treated as a resident and their foreign-sourced income becomes liable to income tax in New Zealand.

The trust rules, which are contained mainly in subpart HH of the 2004 Act, also are amended to introduce the concept of a transitional resident. In essence, these changes delay the time at which the settlor of a trust who is a transitional resident is regarded as becoming a New Zealand tax resident. The time at which the settlor becomes a tax resident impacts upon the status of the trust for tax purposes, which in turn impacts upon, for example, how distributions from the trust to beneficiaries are taxed.

Disclosure requirements for foreign trusts

The second area of change which is of particular interest to non-residents is the introduction of disclosure requirements in relation to foreign trusts. In simple terms, a foreign trust is one where no settlor of the trust has been tax resident in New Zealand from the time the trust was settled until the time at which the status is being assessed (usually, when a distribution is being made from the trust). The New Zealand resident trustee of a foreign trust (the resident foreign trustee) must disclose:

  • the name and other identifying particulars of the foreign trust (for example, the date of settlement);
  • name and contact particulars of the resident foreign trustees;
  • whether the settlor is a resident of Australia;
  • if the resident foreign trustee claims to be a 'qualifying resident foreign trustee';
  • the name of the 'approved organisation' and the name and contact details of the natural person whose membership of the approved organisation meets the requirements to be a qualifying resident foreign trustee; and
  • if the resident foreign trustee has been appointed by another resident foreign trustee as an agent, the name of the trustee appointed as agent and the name of the appointing trustee.

Any changes to the above particulars must also be disclosed to the Commissioner. The disclosure requirements come into force on 1 October 2006. Differing timeframes apply to foreign trusts where the trustees are all offshore and one of them then becomes a New Zealand resident, and, to foreign trusts which already have a New Zealand resident trustee.

A ‘qualifying resident foreign trustee’ is a person who is a resident foreign trustee and who:

  • if a natural person, is a member of an approved organisation; and
  • if not a natural person, has a director (or other natural person in a position allowing significant influence over the management of administration of that person) who is a resident and a member of an approved organisation.

As the name suggests, ‘approved organisations’ are required to be approved by the Commissioner and the members must typically provide trustee services in the course of the business activities or satisfy other criteria acceptable to the Commissioner. The natural person members of that organisation must be subject to a professional code of conduct and subject to a disciplinary process intended to enforce compliance with the code.

In discussion documents that preceded the Amendment Act, the Commissioner indicated that the New Zealand Law Society and the New Zealand Institute of Chartered Accountants would classify as approved organisations. This definition allows the Commissioner to approve further organisations, although at this point in time it is difficult to predict which organisations would qualify.

A point of interest in relation to the disclosure requirements is the specific reference to Australia. Whilst the discussion documents that preceded the Amendment Act indicated the rationale underpinning the reform was to enable New Zealand to comply with its obligations under mutual assistance provisions (in various double tax agreements), the specific reference to Australia suggests that Australia had sought or wished to seek information in order to detect avoidance by its tax residents through using the New Zealand foreign trust regime and thereby to protect its tax base. Certainly, the Commentary and the Explanatory Note to the Bill (from which the Amended Act resulted) make it clear that the Inland Revenue Department will automatically provide the information received to the Australian Tax Office.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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