Trusts, Tax and Australian Beneficiaries.

Over the years Mark and Jane had built up a very successful property portfolio. They had heeded the advice of their accountant many years ago and all the properties were in a trust. Mark and Jane were the trustees, together with their accountant. The trust had recently sold one of its commercial properties and the trustees had agreed to distribute some of the capital to the three children. Their trustee accountant also suggested that it was timely to review the trust, its purpose and documents. She also mentioned that she would be retiring in the next couple of years and wasn’t keen to remain on as a trustee and that part of the review should be considering a succession plan for trustees. Mark and Jane were going to go and see their lawyer, but their accountant said that trusts have become very specialised and she recommended a lawyer who was an expert in the area.

Mark and Jane set up a meeting and went to see the trust lawyer. She reviewed the trust deed and made some recommendations of some minor changes to bring the trust deed up to date. They told her that their accountant was going to be retiring as a trustee in the next couple of years and said that they would be keen for their children to become trustees at that time. The lawyer gave them good advice around retaining a professional trustee because as she said “you don’t want your children telling you what to do with the trust assets”.

The lawyer then asked some questions about the children and their circumstances. Mark and Jane told her about the distribution they were about to make to each of them to help them reduce their mortgages. The lawyer gave some really good advice around making sure that any gift or distribution would be structured in a way to ensure that the money would be protected from the children’s partners. This wasn’t a major concern for Mark and Jane as they really liked all of their children’s partners, but they did recognise that things could change in the future.

More alarming was what the lawyer said about Kate in Australia. She explained that Australia doesn’t love trusts the way we do in New Zealand and that if an Australian tax resident receives a distribution from a trust - even a New Zealand trust, that distribution will be taxable in Australia. This was of concern, not just with the funds that Mark and Jane wanted to give to Kate from the sale of the commercial property, but if they died, they didn’t want Kate’s share of her inheritance to be taxable. The lawyer went through some restructuring they would need to do to ensure that anything Kate might receive from them now, or in the future, would be via them or their estate rather than the trust.

She also mentioned that it would be really important, regardless of what they decided to do with their trustee succession plan, that Kate not be appointed as a trustee. If a New Zealand trust has an Australian tax resident trustee, this will pull all the assets of that trust into the Australian tax net, which can be an unintended consequence of using a family member as a trustee.

Even though Australia is our closest neighbour, and the country which is arguably the most like New Zealand, their laws around trusts and tax are vastly different to those in New Zealand. There needs to be very careful planning if a trust has Australian beneficiaries and it is important that Australian tax residents are not trustees (nor have the control of the trustees) of a New Zealand trust.

Mark and Jane were fortunate that they took advice before doing anything. This gave them an opportunity to carefully structure their affairs. Others aren’t so lucky.