This document discusses potential tax implications of a trust making distributions or loans to beneficiaries who are overseas tax residents. It summarizes key tax considerations and information sharing agreements for several jurisdictions, including Australia, China, India, the US, and the UK. The document cautions that capital distributions can have unintended tax consequences. It also notes increasing global transparency with the Common Reporting Standard and other information exchange agreements.

1. Terry Baucher
May 2019
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Taxation and off–shore beneficiaries

2. Today’s session
• Overview of potential pitfalls involved in a trust
making distributions, or providing funds to
beneficiaries who are overseas tax residents
• Opportunities exist for tax planning
• But…overseas jurisdictions tax treatment of trust
distributions can differ in critical aspects
particularly for “capital” distributions and loans
• Distributions/loans may have implications under
CRS/AEOI, FATCA and EU 4th & 5th AML Directives

3. New Zealand tax – the basics (1)
For purposes of this presentation I’ve assumed:
• Any trust is a “standard” New Zealand trust (a
complying trust) i.e. settled under New Zealand law
by a New Zealand resident settlor with New
Zealand resident trustees
• Distributions are at discretion of trustees
• No settlor, trustee or other person with a power of
appointment over a trust is resident outside New
Zealand

4. New Zealand tax – the basics (2)
• Income derived by a trustee of a complying trust is
either classified as beneficiary income or trustee
income
• Income distributed to beneficiary is “beneficiary
income” & taxed at beneficiary’s marginal rate
• Trustees may have up to 12 months after end of
income year to distribute beneficiary income
• Income not distributed is trustee income and taxed
at 33%

5. Distributions to overseas beneficiaries could be a
means of reducing tax bill.
For example trust has income of $100,000
Tax as trustee income @33% $33,000
Distribute $25,000 to four non residents
Tax on $25,000 = $3,395 each $13,580
Possible saving $19,420
Trust distributions – the opportunity

6. Beware of the tax distraction…
Overseas tax
authority
TrusteesTax benefits

7. New Zealand tax
Financial Arrangements Regime
• Alternative to distributions could be to make loan to
beneficiary
• BUT if loan not NZD denominated then forex issue
under financial arrangements regime arises
• For example in July 2019 the Jon Snow Trust advances
£250,000 to Jaime, a beneficiary living in London
• July 2019 value £250,000 @ 0.55 $454,545
• 31st March 2020 value £250,000 @ 0.50 $500,000
• Unrealised foreign exchange gain $45,455

8. Meet Carol
• Widowed but in good health now living in
Auckland after living in America, Australia and
the United Kingdom
• Carol’s assets are held in trust for asset and
estate planning purposes
• The beneficiaries include Carol’s two children
and five grandchildren
• Carol would like to make regular distributions
to her family

9. Australia
• Lucy, one of Carol’s grandchildren, has been
living and working in Sydney since 2016.
• She qualifies as a “temporary resident” for
Australian tax purposes.
• As such Lucy is NOT taxable on non-Australian
sourced investment income and capital gains.
• This would cover distributions of New Zealand
interest and rental income, and dividends from
non-Australian companies

10. Australia – timing of income
• Australian tax year runs to 30 June
• If beneficiary not a temporary resident the
beneficiary is taxable when “presently entitled” to
trust income for a tax year
• A beneficiary is “presently entitled” when he or
she has by the end of that tax year, a present or
immediate right to demand payment from the
trustee
• For example, a distribution relating to the year
ended 31st March 2019 allocated on 1st July 2019
would be taxable in the year ended 30th June 2020

11. Australia – Capital Distribution (1)
• In December 2017 ATO finalised Taxation
Determinations TD 2017/23 and TD 207/24 relating
to the treatment of capital gains made by foreign
trusts
• Under Determination TD 2017/23 where a foreign
trust distributes a capital gain which does not
represent “taxable Australian property” for capital
gains purposes to an Australian resident, the
beneficiary is assessed on that gain as if it is ordinary
income

12. Australia – Capital Distribution (2)
• Under the Determination the distribution does not
retain its character as a capital gain
• The 50% discount for capital gain is therefore no
longer available and capital losses of the
beneficiary are not available for offset against the
gain
• Accordingly, such a distribution to an Australian-
resident beneficiary could be taxable at up to 45%
• It is NOT clear if Determination TD 2017/23 applies
to any distribution received by someone who is a
temporary resident

13. Australia – Capital Distribution (3)
• Furthermore the two Determinations also deem
the full amount of a loan made by a New Zealand
trust to an Australian resident beneficiary to be
income
• Again it is not clear if the temporary resident
exemption is available in such circumstances
• This treatment could also apply to distributions of
trustee income

14. Australia – Information Sharing (1)
• Australia is a signatory to the CRS/AOEI
• Separately, information can be shared under
Article 26 of the Australia-New Zealand DTA
• During the year ended 31st December 2018, Inland
Revenue sent 64 exchange of information requests
to the ATO and received 13 in turn

15. Australia – Information Sharing (2)
• Article 27 of the DTA allows for assistance in the
collection of taxes
• As of 30th June 2018 approximately $49 million of
income tax, PAYE, FBT and GST owed by persons
whose last known address was in Australia
• During the year ended 30th June 2018 Inland
Revenue sought assistance from the ATO under
Article 25 in relation to two cases, one involving
over AUD1.4 million
• These are separate from actions taken over Child
Support and Student Loan debt

16. People’s Republic of China (1)
Carol’s grandson Arawa and his Chinese partner,
Li want to purchase an apartment in Shanghai and
the trustees of the Carol Family Trust propose
making a distribution to assist Arawa and Li with
the purchase.

17. People’s Republic of China (2)
Income distribution:
• Investment income taxed at 20%
• Exception is royalties which are taxable at up to top
rate of 45%
• Taxable in year of receipt (Chinese tax year is 31st
December)

18. People’s Republic of China (3)
Capital distributions:
• Distribution of capital gains taxable at 20%
• Not clear what would be treatment of distribution of
trustee income. Worst case view would be that
taxed at 20%
• At present no specific measures regarding interest
free advances

19. People’s Republic of China (4)
Other issues:
• Anti-avoidance measures introduced in August
2018 could affect attempted tax–free capital
distributions
• Also in August 2018 State Administration of
Taxation announced crack down on non-
declaration of income including use of trusts
• The State Administration of Taxation also intends
to make greater use of the information exchange
provision in Article 26 of the DTA with New Zealand

20. India (1)
• Carol’s granddaughter Arabella lives in Mumbai
• A distribution of income would represent income for
Arabella taxed at her marginal rate
• The Indian tax year end is 31 March
• Normal tax rates between 5% and 30%
• 10% surcharge applies to incomes over 1,000,000 INR
(@$22,000)
• Surcharge is 15% if income exceeds 10,000,000 INR
(@$220,000)

21. India (2)
• If a capital distribution is made to Arabella then taxed
at a flat 20% if it represents a “long-term” gain
• Long-term gains are those arising from assets held for
more than 24 months
• If not a long-term gain then treated as income and
taxed at relevant rate
• India another example of the need for trustees to
maintain records as if a CGT applied

22. India (3)
• India has no specific gift duty. But amounts
exceeding 50,000 Indian Rupees (@$1,100) in year
received from any person who is NOT a relative
deemed income if made without consideration or for
an inadequate consideration.
• Alternative might be for trust to distribute or lend
funds to a beneficiary (maybe Carol) who then gifts
the sum to Arabella.

23. India – Information Sharing
• India is a signatory to CRS/AEOI
• India has a double tax agreement with New Zealand
• Article 26 provides for exchange of information
• From 7th September 2017 Article 26A enables the
Indian Income Tax Department and Inland Revenue
to assist each other in the collection of “revenue
claims”

24. United States of America (1)
Carol’s grandson Rangi is an actor living in Los Angeles
• Distribution of income is taxable in year of receipt
and at Rangi’s marginal tax rate
• Tax rates vary from 10% to 37%
• Rangi will also need to complete and file a form
3520 Annual Return reporting the transaction

25. United States of America (2)
If a capital distribution is made to Rangi
• Distribution of capital gain is taxable
• Distributed capital gain must also be included on
form 3520
• Form 3520 also takes into consideration the
undistributed income of the foreign trust from
earlier years and applies a weighting to determine
the amount of the taxable distribution
• This would appear to catch distributions of trustee
income

26. United States of America (3)
For purposes of form 3520 distributions also include:
• Loans from a foreign trust
• Use of property of foreign trust at below market
value (e.g. staying rent free at family bach)

27. United States of America (4)
• In addition to form 3520, a foreign trust with a
United States “owner” must file an annual
information return form 3520-A
• It appears that for this purpose “owner” includes a
United States resident beneficiary (i.e. Rangi)
• Details to be included on form 3520-A include all
worldwide income prepared under United States
income tax principles
• The form also requires a balance sheet of all assets
and liabilities of the trust

28. United States of America
Information Sharing
• United States is NOT a signatory to CRS/AEOI
• Information must be provided to IRS under FATCA
but no mutual sharing of information
• Separately information is shared on request under
Article 25 of the DTA between New Zealand and the
United States of America
• At present no clause in DTA providing mutual
assistance in collection of taxes

30. United Kingdom – Remittance Basis
• A special remittance basis is available for persons
who are tax resident but not domiciled in the UK,
commonly referred to as “Non-doms”
• These persons are only taxable on income and gains
remitted to UK. Carol’s granddaughter Lizzie
qualifies as a non-dom
• Remittance basis rules have changed significantly
over past ten years but still offer some tax planning
opportunities

31. United Kingdom
Remittance Basis Example 1
• For the year ended 31st March 2020 Carol’s family
trust proposes distributing New Zealand interest
of £1,900 to Lizzie
• The distribution will be credited to her beneficiary
current account
• As Lizzie is a non-dom and the income has not
been remitted to the UK she can exclude it from
her UK tax return for the year
• She is still entitled to her UK tax-free personal
allowance of £12,500 for the year ended 5th April
2021

32. United Kingdom
Remittance Basis Example 2
• Alternatively, Carol’s trust proposes distributing
New Zealand rental income for the year ended
5th April 2020 of £15,000 to Lizzie
• Lizzie can exclude the rental income from her
UK tax return for the year
• If she does this, she will then NOT be entitled to
the UK tax-free personal allowance of £12,500
• Trade-off between lower tax for trust and
higher tax for Lizzie

33. United Kingdom
Capital Distribution (1)
• During the year ended 5th April 2020 Carol’s trust
sold a flat previously occupied by Carol as her
principal residence
• The sale realised a gain of £150,000
• Carol would like to distribute this to Lizzie to
enable Lizzie to purchase a property in London

34. United Kingdom
Capital Distribution (2)
• Distribution would be caught under anti-avoidance
provisions effective 6th April 2018
• Distribution would be treated as a capital gain for
Lizzie taxable at up to 28%
• Lizzie can use her CGT annual tax-free allowance of
£12,000 against distributed gain

35. United Kingdom
Capital Distribution Alternative (1)
• Trustees suggest distributing the capital gain to
Carol who then gifts it to Lizzie
• This is also no longer possible from 6th April 2018
• From that date UK resident beneficiaries will be
taxed on distributions of accumulated income and
capital gains made to them
• No longer possible to “wash-out” accumulated
income and gains by distributing them to other
persons not resident in UK

36. United Kingdom
Capital Distribution Alternative (2)
United Kingdom
Interest free loan in GBP
Family
Trust
New Zealand
Lizzie
(Beneficiary)
• If lent in GBP – forex issue
• UK situated assets of the trust also
includes the interest free loan
• Loan now subject to inheritance tax
• 4th AML Directive disclosures
Instead of a distribution Carol’s lawyer suggests the trust lends
the £150,000 to Lizzie

37. Beneficiaries in the UK – Disclosures (1)
Reg 45(14) The Money Laundering, Terrorist Financing and
Transfer of Funds (Information on the Payer) Regulations 2017
in force 26th June 2017
The NZ trust will have reporting obligations to HMRC in every
year in which trustee LIABLE to pay ANY of the following taxes
in the UK:
• Income tax;
• Capital gains tax;
• Inheritance tax;
• Stamp duty reserve tax; and
• Stamp duty land tax.

38. Beneficiaries in the UK – Disclosures (2)
If a New Zealand trust has a reporting obligation then it must
provide following information:
• Name, date of establishment, country of residence and
country of administration of trust, and details of the
trustee;
• Name, tax number, address, passport number, and date of
birth of settlor, all current beneficiaries, and “all controlling
persons” (including protectors and any other person with
the ability to influence the trustee’s decisions);

39. Beneficiaries in the UK – Disclosures (3)
Reporting obligations continued:
• Description of the class of “potential” beneficiaries,
INCLUDING any wishes as to future beneficiaries by the
settlor in a Memorandum of Guidance or other document;
• Details of the trust’s worldwide assets including current
market value; and
• Details of the trust’s legal, financial and tax advisors.
• If not already registered with HMRC must report by 31
January following end of tax year

40. Beneficiaries in the UK
Other information sharing
• Article 25 of the UK-NZ DTA is the “standard” information
sharing provision
• During the year ended 31st December 2018 Inland Revenue
sent HMRC three exchange of information requests and
received nine
• Article 25A provides for mutual assistance in collection of taxes
• As of 30th June 2018 approximately $652,000 of income tax,
PAYE and GST owed to Inland Revenue by persons where the
last known address was in the UK
• For the year ended 30th June 2018 Inland Revenue made one
request to HMRC for assistance and received three

42. Possible planning options
Income
Income
Trust
New Zealand
Offshore
Beneficiaries
Capital
Trust
Overseas
Capital
Distributions
Income
Distributions

43. Conclusion
• General rule is that income distributions are
usually taxable
• May be more opportunities for beneficial tax
planning on income distributions to
beneficiaries in Australia and the UK
• Distributions of capital very problematic
• Factor in effect of CRS/AEOI, FATCA and
other information sharing initiatives

44. Questions