Complying trusts

Clauses 167 and 170

Submissions

(Crowe Horwarth, EY)

1.       The amendment does not necessarily ensure that all trustee income is subject to tax in New Zealand at the trustee rate.  (Crowe Horwarth, EY)

2.       Clarification of the drafting may be necessary, particularly in relation to the making of elections and references to “income tax liability” criteria, to ensure the proposed provisions apply as intended.  (Crowe Horwarth, EY)

3.       Trusts that have previously identified their settlors as being non-resident and have chosen not to be a complying trust should be able to elect to become complying trusts by retrospectively paying tax on the world-wide trustee income.  (Crowe Horwarth)

4.       Previous income tax legislation should also be amended so the amendments clearly apply for pre-2008–09 income years.  (EY)

Comment

Submissions 1 and 2

The proposed amendment seeks to ensure that trustees of complying trusts are not disadvantaged if a settlor of a trust migrates from New Zealand:

  • resulting in the trust not having a settlor resident in New Zealand from that time; and
  • the trustee is unaware that the settlor has migrated from New Zealand.

The submission states that if a trust does not have a settlor resident in New Zealand, the proposed amendments do not ensure that the taxable income derived by the trustees is liable for tax at the trustee rate if all trustees are non-resident and the income includes interest, dividends or royalties derived from New Zealand.

The submitter considers the non-resident withholding tax (NRWT) rules may continue to cap the income tax payable on that income to the NRWT rates.  This would occur if the NRWT was a final tax.  We also note that a double tax agreement may limit New Zealand’s taxing right on interest, dividends or royalties, even if the NRWT is not a final tax.

The policy intention is that a complying trust is one on which the worldwide trustee income of the trust is taxed (after taking into account allowable deductions) at the trustee rate.  This means that if NRWT on interest, dividends or royalties is a final tax or relief is available under a DTA, a trust would not pay tax on its worldwide trustee income at the trustee rate.

We agree with the submitter that:

  • the amendments do not ensure that a trustee’s income is subject to tax at the trustee rate; and
  • the proposed amendment requires clarification to ensure the policy intention is achieved.

We agree with the submission that these concerns would be substantively addressed by ensuring that the election to be a complying trust requires:

  • the trust to pay tax on its worldwide trustee income at the trustee rate; and
  • the trust to be treated as if it had a settlor and a trustee resident in New Zealand.
Submission 3

The main benefit of a trust being a complying trust is that distributions to the trust’s beneficiaries are not taxed to the beneficiary unless the distribution is beneficiary income (distribution of the current year’s earnings of the trust).

We agree that the proposed amendment would apply when the trustee has continued to pay tax at full rate in the mistaken belief the trust is a complying trust.

The submission seeks a change in policy in relation to trustees who, at some time in the past, had knowledge that no settlor of the trust was then resident in New Zealand.  The trustee has a period of time in which to choose to pay tax on worldwide trustee income at the trustee rate or be treated as a foreign trust or a non-complying trust.

Given that these trustees have considered these options at the time the settlor becomes non-resident, we consider that this submission raises a policy question that goes beyond the scope of the current amendment.

Submission 4

EY considers that the retrospective application to the beginning of the 2008–09 income year may not fully protect the treatment of distributions and the New Zealand income tax position of beneficiaries.  In particular EY focuses on whether distributions from a trust enjoy the exemption given to distributions from a complying trust.

A distribution from a trust to a beneficiary is exempt from income tax if the trust has been a complying trust at all times, from the time the trust was either settled or a settlor migrates to New Zealand, until the distribution was made.

We agree with EY’s submission that, under the proposed amendment, a trust may not be a complying trust from the 2008–09 year if:

  • the trust did not have a New Zealand resident settlor prior to the 2008–09 year; or
  • the proposed amendment does not apply to a trust prior to the 2008–09 year.

We agree that the drafting of the proposed amendment should be clarified so that it achieves the policy intention.

Recommendation

That submissions (1) and (2) be accepted.

That submission (3) be declined.

That submission (4) be accepted.