This Person Was Unaware of their $50,000 Tax Liability
13 April 2018
THIS PERSON WAS UNAWARE OF THEIR $50,000 TAX LIABILITY
Tax of overseas investments is an awkward area and there are a lot of ways you can get caught out on tax.
Sam was born in London. He moved to New Zealand when 25 years old, approximately 15 years ago.
He is a New Zealand tax resident.
Sam's parents still live in London and have a wealthy Trust that is generating $150,000 of profit that is retained in the Trust. As the parents are getting older, the famly agrees that Sam should be a Trustee of the Trust.
As the Trust is overseas, Sam does nothing in New Zealand.
Five years later, Sam is audited by IRD.
- Sam should have completed a Foreign Trust disclosure.
- As the disclosure has not been completed, any foreign sourced income is taxable in New Zealand. So approximately $50,000 tax bill in New Zealand for each year, plus penalties and interest!
How could this be avoided?
New laws came in on 21 February 2017 that Foreign Trusts must register in order to have an exemption on foreign-sourced income by 30/06/17. Or, there is a 4 year grace period for natural people, not in the business of trustee services.
So, if Sam had registered with IRD, then the foreign income from the Trust would not be taxable in New Zealand.
A Foreign Trust, in broad terms, is a Trust settled by a person that is not a tax resident of New Zealand at the time of settlement.
Some other potential overseas Trust issues
1. An overseas person has an overseas Trust. They move to New Zealand. They have 12 months to elect the Trust to become a complying Trust, which can give large tax benefits going forward. Or a non-complying trust can be taxed at 45%!
2. If you receive a distribution from an offshore trust: - Most likely some of this distribution is taxable and there are ordering rules that must be applied to work out what the distribution is made up of. First is current year Trustee income, second is trustee income that is not beneficiary income of an earlier income year, both of which are a taxable component in New Zealand. Any capital gains and corpus will not be taxable, but these come after the taxable parts which must be accounted for first.
3. In some cases, the New Zealand resident beneficiary needs to account for the income or losses on the underlying assets from the day of death of the parents.
Common Reporting Standards (CRS) - NEW!!
First reporting period 30/06/18.
If you have a Trust that meets both of these requirements:
- 50% or more of assets in financial assets (i.e. investment in Craigs Investments)
- And the financial assets are managed (i.e. Craigs Investments manages the portfolio for you)
then the Trust will need to go through the self-certification process - Need to ask the account holder whether they are a relevant foreign tax resident. The Trust will need to keep a record of the self-certification and the process they used to obtain it. You can find more information on forms IR1052 and IR1053 on the IRD website: www.ird.govt.nz.