Are you planning to move to Australia? Do you have a family trust? Kay Caverhill, of Hesketh Henry in Auckland, gives an overview of the Australian tax regime as it affects New Zealand trusts.
IntroductionThe constant trickle of New Zealanders moving to Australia has meant that many people have had to examine the impact of that move on their family trust. Should they wind up their trust and distribute the assets? Can they simply pack up the trust with the rest of their belongings and administer it in Australia?
The change of residence has significant tax implications in Australia. Those implications can be summarised under three headings – residency, transferor trust rules, and capital gains tax.
Australian ResidencyTo understand a trust's tax residency it is necessary to understand the rules for the tax residency of individuals.
The Australian residency rules are a combination of statutory rules and case law. An individual will be a resident of Australia for Australian tax purposes by meeting any one of the following tests:
being a resident of Australia according to ordinary concepts; living in Australia unless his or her permanent abode is outside Australia; living in Australia for one half of the year (ie more than 183 days) unless his or her usual abode is outside Australia and he or she does not intend to take up residence in Australia; belonging to certain commonwealth government superannuation schemes or being the spouse or child under 16 of a person who does.A trusts tax residence is very much bound up with the residence of the people who formed the trust or administer it. For tax purposes a trust is categorised as either a resident trust or a non-resident trust.
Resident Trust A trust formed in New Zealand will be an Australian resident trust where at any time during the income year (1 July to 30 June) a trustee is an Australian resident or alternatively where the trust is managed and controlled in Australia.
Note that it is not necessarily sufficient to simply appoint New Zealand resident trustees. Some New Zealanders before leaving for Australia have simply appointed New Zealand resident trustees. However, this is not necessarily sufficient to keep the trust&'s residence in New Zealand and therefore outside the Australian "tax net".
Non-Resident Trust This is a trust where no trustee is resident in Australia at any time during the income year and the management and control of the trust is also outside Australia throughout the income year. Non-resident trusts can only be taxed in Australia on income derived from sources in Australia.
Transferor Trust RulesThe transferor trust rules are anti-avoidance rules. They are aimed at stopping the practice of deferring Australian tax by accumulating foreign income in a non-resident trust. The transferor is the person who originally sold the assets to the trust. If the transferor is an Australian resident, then he or she is deemed to receive a market rate of return on the assets transferred to their trust. This applies even if the transfers occurred before he or she became an Australian resident and the trust receives and distributes no income in Australia! In other words, if you left assets in a trust in New Zealand and then became an Australian resident, you would be treated in Australia as if you received a market rate of return on those assets. That "income" would be taxed accordingly. In addition, if one of the assets left in the New Zealand trust was your family home you would pay capital gains tax if you sold it.
Capital Gains Tax ("CGT")Australia taxes capital gains arising from certain assets. Upon becoming an Australian tax resident, each CGT asset will be deemed to have a value equal to its market value when its owner becomes an Australian tax resident. When the asset is sold, CGT is payable on the difference between the sale proceeds and the asset's market value when its owner became an Australian tax resident.
There is an important exception in the CGT regime - if you sell your Australian family home and it was your main residence, the proceeds will not be subject to income tax or CGT. You must own your Australian family home in your personal names in order to come within this exception.
SummaryEach individual's circumstances are different, so everyone needs separate advice. However, as a general rule, if New Zealanders are moving to Australia permanently then they should wind up their trusts before they leave. Otherwise they run the risk of triggering the Australian transferor trust rules and capital gains tax.
In addition, when buying a new family home in Australia the purchase should always be in individual names. Otherwise the transaction will attract capital gains tax.
There is some scope for keeping your New Zealand trust if:
you are not planning on becoming an Australian resident; or the trust does not own assets which are subject to Australia's capital gains tax; or the person who originally sold their assets to the trust is dead.© The Lawlink Group Ltd 2002
Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters. Any reference to law and legislation is to New Zealand law and legislation.
Kay Caverhill is a senior solicitor with the Auckland Lawlink firm of Hesketh Henry. Kay specialises in asset management, estate planning, asset protection, and trusts and wills.
Web site:
Hesketh HenryEmail: kay.caverhill@heskethhenry.co.nz