What’s going on with foreign trusts?

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Henry VIII tried to restrict the use of trusts.

Trusts are weird beasts. They seem to have originated during the crusades: a death-and-mayhem-seeking-pilgrim would head off to the Holy Land, but in order to protect himself and his wife and his children and his property, he would hand over the “use” of his property to a reliable friend or neighbour. That friend would hold the property, in effect own it, for the benefit of the wife and children and so on. These “uses” turned out to be very effective vehicles for all sorts of chicanery, so eventually, Henry VIII tried to ban them. But they crept back, as trusts.

The basic idea of a trust is that someone who owns property hands that property over to another person, who holds it for the benefit of a third person. The person who gives the property is the settlor, the person who holds the property is the trustee, and the person who gets the benefit of the property is the beneficiary.

From the New Zealand government’s point of view, it doesn’t want New Zealand residents squirrelling property away into overseas trusts where the government can’t tax it. To prevent this, the New Zealand government bases taxation of trusts on where the settlor (the person who gives property to the trust) lives. If you are living in New Zealand (technically, if you are a New Zealand tax resident) and you give property to a trust, then the government here will tax that trust.

So what’s the beef with foreign trusts?

New Zealand tax law allows a foreign person who is not living in New Zealand to settle property on a trust, for the benefit of foreign persons who are not living in New Zealand at all, and at the same time, have a trustee here in New Zealand. But the settlor is overseas, and the beneficiaries are overseas, so the trust doesn’t get taxed here, at all.

That all seems fairly innocuous, provided that the trust gets taxed somewhere. But other countries don’t have the same rules as us. Many other countries tax trusts on the basis of where the trustee lives. If the trustee lives in your country, then you tax the trust, but if the trustee lives overseas, then they don’t tax it.

This means there is a mismatch between New Zealand’s rules for taxing trusts, and other countries’ rules for taxing trusts, and that mismatch creates a loophole that can be exploited. There’s quite a lucrative industry here in New Zealand, providing trustee services to foreign trusts, that was estimated in 2009 to earn about $20million in fees every year.

Overseas tax regimes can get at the property held by the New Zealand trustee, but only if they actually know about it. It’s very hard to tax something that you don’t actually know exists.

Unfortunately, the New Zealand tax administration doesn’t collect much information about foreign trusts with New Zealand resident trustees. If you look at the IRD’s Foreign Trust Disclosure Form, you will see that all a trustee has to disclose is the name of the trust, the name of the trustee, and whether or not the settlor (the person who gives property to the trust) is resident in Australia.

This all makes it very easy indeed for foreigners to channel money through trusts with a New Zealand trustee. It pushes us dangerously close to being a tax haven, and in fact, there are plenty of tax consultants and trustee firms advertising their services to enable people to take advantage of the laws. This very much suggests that we are in fact, operating as a tax haven.

The solution is quite straightforward. Up the disclosure requirements. Trustees should have to disclose the name of the trust, the names of the settlors, the value of the property held on trust, a description of the property held on trust, and the names of the beneficiaries. And this information should be made available to other tax regimes. If the authorities in the United Kingdom want to know which of their tax residents are settlors or beneficiaries of New Zealand foreign trusts, then our Inland Revenue Department should be enabled to pass on the information.

There’s just one slight caveat. There can be good reason for some people to want to hold money in a trust where it can’t be found. Perhaps people fighting for democracy in an oppressive regime might want to take steps to protect their property, so that if all else fails, they can flee. But surely we can design some measures to provide for this contingency. And in the meantime, we should be committed to letting some sunlight in.

Of course, the people setting up and selling foreign trustee services will miss out on their fees, and perhaps they will be lobbying hard to keep this handy loophole. But I’m not feeling all that sympathetic. They’re exploiting the loophole just as much as the foreign settlors and beneficiaries are, and they’re dragging down New Zealand’s good reputation in international tax.

Further reading:
Terry Baucher on “The curious world of foreign tax trusts…
Richard Murphy on how we can tell that NZ is a tax haven

This entry was posted in Economics, NZ Politics, Taxation and tagged , . Bookmark the permalink.

2 Responses to What’s going on with foreign trusts?

  1. Thanks for this blog post regarding foreign trusts; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

  2. Jim Rose says:

    Interesting post. Do you how many other countries tax trusts on the basis of where the trustee lives?

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