How do trusts work?

In common law legal systems (such as New Zealand, the UK, the US, Canada and Australia) property can have a legal owner and a beneficial (or real) owner.  Where this is the case, there is a trust.  The legal owner is the trustee and owns the thing on trust for the real owner (the beneficial owner).

A simple example of this is where somebody buys shares in a company on the stock exchange through their share broker and the shares are registered in the name of the share broker’s nominee company.  In that case the nominee company is the legal owner of the shares (because the shares are registered in its name) but it holds those shares on trust for the broker’s client.  That client is the beneficial owner.  This type of arrangement is known as a bare trust.

The trusts we offer are discretionary trusts.  A discretionary trust is established by a document called a trust deed.  The trust deed sets out that the trustee owns the assets on trust for a listed group of people (the beneficiaries) – eg, the person who establishes the trust and their spouse and children.  The trust deed will allow the trustee to decide whether income earned by the trust is kept in the trust or passed to the beneficiaries.  The trust deed will also allow the trustee to decide which of the beneficiaries are to receive anything from the trust and when.  The beneficiaries have no right to receive anything from the trust but do have a right to have the trustee consider whether to distribute anything to them.  The trustee must act in the interests of the beneficiaries.

A trust, unless the only beneficiaries are charities, must have a set life span that cannot exceed 80 years.  The trust deed will set out who is to receive the trust property when it comes to an end.  This will generally be the beneficiaries of the trust or a particular group of them – eg, the grandchildren of the person who established the trust.  The trust deed may also provide that the trustee can end the trust earlier.  If, for example, the law changed to tax trusts in an unfavourable way, the trustee could resolve to end the trust and distribute its assets to the beneficiaries.

Such discretionary trusts are widely used in New Zealand and in other common law jurisdictions.  They have a number of advantages.  For example, income can be allocated to the beneficiaries with the lowest tax rate or kept in the trust where that gives a better tax result.  People owed money by a beneficiary cannot get access to the property of the trust because the beneficiary does not own it.  For example, it is very common in New Zealand for a person’s family home to be owned by a trust.  If the person is bankrupted, the house will continue to be owned by the trust and the trustee will allow the person and their family to continue to live in the house.

Tax-free trusts for non-residents

A trust is resident in New Zealand for tax purposes if one of its trustees is resident in New Zealand.  A company incorporated in New Zealand is resident in New Zealand.  Generally, a New Zealand resident trust will pay New Zealand tax on all income it earns anywhere in the world.  If the trustee allocates that income to a New Zealand resident beneficiary, it is the beneficiary that pays the tax instead.

BUT, where the trust is settled (established) by a person who is not resident in New Zealand, the trust does not pay New Zealand tax on any income the trust earns outside New Zealand.  That is, income such as dividends from a non-resident company, interest on deposits outside New Zealand or royalties paid by a non-resident in relation to a business outside New Zealand will not be taxed in New Zealand.  This type of trust is an NZ foreign trust.

Also a beneficiary of a foreign trust who receives an amount from the trust, and who is not resident in New Zealand, is not taxed on that amount if it comes from income earned outside New Zealand.

Note:  Advice should be taken if the person who settles the trust decides to move to New Zealand.  In that case, it may be advisable to wind up the trust or make a particular election to be treated as different type of trust in the future.

Example

Mary, who is not a New Zealand resident, settles a discretionary family trust.  The beneficiaries are Mary, her husband and their children.  The trust deed allows Mary to add further beneficiaries and to change the trustee if she wishes.  The trustee of the trust is M Trading Limited, a New Zealand incorporated company.  Mary is the sole director of the company.

Mary transfers to the trust shares in companies incorporated outside New Zealand and the rights to royalties paid for the use of IP used outside New Zealand.  Mary also lends money to the trust which it deposits in Euro denominated interest bearing accounts in the name of M Trading Limited.

The trust pays no New Zealand tax on dividends received from the shares, the royalties paid for the use of the IP or the interest paid on the deposits.  When the trust distributes amounts to Mary or her family those amounts are not taxable in New Zealand because Mary and family are not resident in New Zealand.

New Zealand Trustee

We recommend that a special purpose New Zealand company be used as the trustee of any New Zealand resident trust because: 

• this makes it clear that the trust is resident in New Zealand

• there is no need for 'trust’ or similar words to appear in the company’s name - as far as the rest of the world is concerned, they are simply dealing with a New Zealand company

• if individuals are the trustee(s) then each time one retires, resigns or dies the property of the trust has to be transferred to the new trustees – where a company is used, the individuals can instead be directors of the company and the trustee need never change

• when a trust enters into a contract it does so in the trustee’s name and, unless the contract expressly limits the trustee’s liability, the trustee can be personally liable under the contract – this would not be an issue for a company where its only role was to act as the trustee of the trust.

We offer the following services: 

• establish trust, including incorporating trustee company

• providing shareholder for trustee company¹

• providing a director for trustee company if required²

• provide a registered office fro the trustee (and postal address).

• IRD disclosure information and records in respect of trustee³

• arrange resolution for company annual meeting and prepare and file company annual return and file company financial statements with Registrar of Companies

• preparation of financial statements by accountant⁴ and audit of financial statements by auditor¹

• opening NZ bank accounts for the trust

Notes 

1.  If the company is owned by a New Zealand resident, it will not have to appoint an auditor or prepare and file financial statements.  The person who owns the company will not control the property because the company will own the trust property for the beneficiaries of the trust and must act according to the trust deed. 

2.  A company must have at least one director who can be resident anywhere in the world.

3.  A foreign trust will not pay tax on income earned outside New Zealand.  But the trustee is required to provide certain information to, and keep certain records in New Zealand available for, the NZ IRD (tax department).

4.  These services are provided by accountants contracted to NZCTS.