New Zealand: Trustees take note: FATCA and the family trust

Brief Counsel
Last Updated: 21 December 2015
Article by Phillippa Wilkie, Vivian Cheng and Lyndsey Partridge

Most Read Contributor in New Zealand, September 2016

FATCA (the Foreign Account Tax Compliance Act) came into force in July 2014. It is far-reaching and may impose a compliance burden on the trustees of New Zealand family trusts, even if no US persons are involved.

IRD has recently issued further draft guidance on the application of FATCA to trusts and in particular, on the circumstances when New Zealand family trusts will be financial institutions for FATCA purposes.


FATCA is a US initiative designed to target US taxpayers who evade US tax by hiding assets offshore. It requires foreign (i.e. non-US) financial institutions (FFIs) to register with the US Internal Revenue Service (IRS) and undertake due diligence to identify and report on accounts that US persons hold with them. FFIs that do not comply are subject to a 30% withholding on US-sourced income.

Under the Intergovernmental Agreement (IGA) signed between New Zealand and the US, New Zealand agreed to implement rules to require and enable all New Zealand FFIs to comply with their FATCA obligations and, in exchange, the US agreed to treat all New Zealand FFIs as deemed compliant.

All FFIs were required to register with the IRS by 31 December 2014. However, notwithstanding this, there has been considerable uncertainty in relation to whether, and if so, how, FATCA applies to New Zealand family trusts that on their face may have no obvious US connection.

Does a family trust have FATCA obligations?

A trust will have FATCA obligations if it is an FFI. There are four categories of FFIs but the one most relevant to family trusts is Investment Entities. Under the IGA, a trust will be a deemed Investment Entity (and therefore a financial institution) if:

  1. it conducts as a business specified investment activities, such as trading in securities and derivatives, portfolio management, or otherwise investing, administering or managing funds on behalf of others; or
  2. it is managed by an entity that conducts such a business.

Family trusts are most likely to be impacted by (b) above by, for example, engaging an asset manager that is an FFI and therefore being deemed to be an Investment Entity.

IRD's draft guidance states that in order for a trust to be "managed by" an entity, that entity must be in charge of, administer and regulate, or maintain control or influence over all or part of the trust's activities. In contrast, a trust that merely obtains ad hoc advice on its portfolio management is unlikely to be "managed by" the entity.

Most family trusts will not meet the criteria in (a) above because they will not have "customers" or be "in business".

For family trusts that are caught by (b), the US Treasury Regulations may offer some relief. As permitted by the IGA, IRD has indicated that trusts can elect to use the definition of Investment Entity in the US Treasury Regulations in lieu of the corresponding definition in the IGA. The US Treasury Regulations definition is narrower in that the entity must derive 50% of its gross income from the specified investment activities to be deemed an Investment Entity under (b) of the definition.

Example one – investment manager

A family trust has three individual trustees. The Trust assets comprise the family home, valued at $1.2 million and a share portfolio valued at $6 million. The trustees have engaged a professional investment manager to manage the share portfolio and have granted the manager a full mandate to buy and sell investments on their behalf within defined investment parameters.

The trust is an Investment Entity and therefore an FFI because it is "managed" by an entity (the professional investment manager) that is itself an Investment Entity. The trust is not saved by applying the US Treasury definition of Investment Entity as the trust derives more than 50% of its gross income from the specified investment activities.

Example two – paid professional trustee

A family trust has engaged a professional firm to provide a trustee service. The trustee is a company of that firm, which is the trustee for many trusts. The trust pays a trustee fee to the trustee company.

The trust could be an investment entity because it is "managed" by the trustee company, which is likely to be an Investment Entity by virtue of being in the business of managing trust funds on behalf of others.

My trust is an FFI - what do I need to do?

For trusts that are Investment Entities and therefore FFIs, there are three options.

Option One: Reporting FFI

A trust that is an FFI and not a Non-Reporting FFI must:

  1. register with the IRS. This is an online process, which takes about 10 minutes to complete. Once registered, the trust will be issued with a Global Intermediary Identification Number (GIIN). The trust can then provide the GIIN to other FFIs as evidence that it is FATCA-compliant, and
  2. complete due diligence of its accounts. The trust must apply specific procedures set out in the IGA to determine whether any account holders are US persons or entities controlled by US persons. A trust's "account holders" may include settlors, beneficiaries, trustees, protectors and creditors of the trust, and
  3. report to the IRD information on accounts determined to be held by US persons or entities controlled by US persons. Information to be reported includes name, address, account balance or value and total gross amount paid or credited to the account holder. Reporting to the IRD must be done annually by each 30 June for the year ending 31 March. IRD will then send the information to the IRS. IRD has confirmed that 'nil returns' are not required where the FFI has no US accounts on which to report.

Option Two: Trustee Documented Trusts

A trust can become a Non-Reporting FFI and therefore have no FATCA obligations if the trustee is itself an FFI and does FATCA reporting on the trust's behalf.

Option Three: Sponsored Investment Entity

A trust can also become a Non-Reporting FFI by engaging a Sponsoring Entity to act on its behalf. A Sponsoring Entity must be registered with the IRS, be authorised to act for its sponsored entities and fulfil all of the sponsored entities' FATCA obligations.

It is an offence under the Tax Administration Act 1994 to fail to register as an FFI where required to do so.

My trust is not an FFI – does FATCA still affect me?

Trusts that are not FFIs are not required to register, carry out due diligence or report. However, they may be asked by other FFIs (such as banks) with which they hold accounts or on opening a new account to self-certify their FATCA status.

An entity that is not an FFI will be a Non-Financial Foreign Entity (NFFE) and will either be a "passive NFFE" or an "active NFFE", depending on the nature of its activities, assets and income. A trust that is a passive NFFE and that has one or more controlling persons that are US persons may be reported on to the IRD by other FFIs with which it holds accounts. A trust's "controlling persons" may include settlors, beneficiaries, trustees, protectors, and any other person exercising ultimate effective control over the trust.

How we can help

We can provide advice specific to your circumstances. If you wish to discuss how FATCA might apply to you or how to comply, please contact the lawyers featured.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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