Published December 2017
This country-specific Q&A provides an overview to private client law in New Zealand.
It will cover taxes, succession laws, wills, trusts and their structures.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/private-client/
Which factors bring an individual within the scope of tax on income and capital gains?
This will usually turn on the residence of the individual, location of assets and economic activity. An individual is tax resident if they have a permanent place of abode or is personally resident in New Zealand for one or more periods exceeding 183 days in an aggregate 12-month period. A person (including a company) who is a New Zealand tax resident (“NZTR”) is subject to New Zealand income tax on all gross income irrespective of the origin country.
Certain categories are important indicators of New Zealand sourced income, these include but are not limited to the following:
- salaries and wages;
- the ownership and mortgaging of land;
- shares of a resident company;
- government pensions, annuities, income and securities;
- beneficiary income under a trust where the income is derived in New Zealand;
- royalties from a New Zealand resident; and
- any other source in New Zealand (directly).
There is no capital gains tax (“CGT”) in New Zealand, although care must be taken not to buy and sell property in such a way that a business activity is established, thereby making any gains taxable as a business or trading activity.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
The current income tax rates for the 2017/18 income year applicable to NZTR individuals are:
Tax on this income
NZD0 - NZD14,000
NZD14,001 - NZD48,000
NZD48,001 - NZD70,000
There are no estate taxes, CGTs or inheritance taxes in New Zealand. Unless a landowner is dealing in or subdividing land, gains on an increase in land value are not taxable in New Zealand.
Employment income, if earned by way of salary, wages or bonus is taxable at the recipient’s marginal tax rate. Employers must deduct pay as you earn (“PAYE”) tax at the employees’ tax rate to the Inland Revenue Department (“IRD”). The individual is responsible for filing their annual tax return.
Stock options are non-taxable, unless they are deemed to be part of income under an employment contract.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
Interest, dividends and royalties with a New Zealand source received by a non-resident will be subject to income tax. Such payments will generally be subject to a final withholding tax imposed at the following rates (subject to the operation of any applicable double taxation agreement):
Broadly, non-resident withholding income comprises:
- dividends 30% (non-imputed);
- royalties 15%; and
- interest 15%.
Unimputed dividends are taxed at the rate of 30%. There are certain exemptions for interest paid by the approved issuer to a non-associated recipient company, imputed non-cash dividends and certain insurance transactions. All other non-resident withholding income is taxed at a rate of 15%.
The deduction of non-resident withholding tax must be made by the person making the payment. Where a New Zealand agent receives income on behalf of the person by whom the tax is due, the agent is responsible for making that payment.
Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
There is no wealth tax in New Zealand.
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
There are no estate taxes, inheritance taxes nor gift taxes in New Zealand.
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (eg business or agricultural assets), and how do any such reliefs apply?
There are no gift taxes in New Zealand and therefore no applicable tax reliefs exist.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Gifts to qualifying institutions can be claimed back as tax credits in part, this must be done so within a period of four years following the year which the gift was made.
A taxpayer may only claim a tax credit if that taxpayer:
- made a donation of $5 or more to an approved donee organisation where there is no identifiable direct benefit to the taxpayer (or a family member);
- earned taxable income during the same year;
- was a NZTR at any time during that tax year; and
is an individual.
The total gifts that may be claimed may not exceed the taxpayer’s taxable income for the year.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
As mentioned, there is no CGT in New Zealand, however if a business activity is established through the sale and purchase of property, any gains may be deemed taxable as a business or trading activity.
A residential land withholding tax applies to an entity controlled by non-resident person and/or entity who buys a residential property located in New Zealand and sells it within two years (or within four years in the case of a trust with a beneficiary who is an offshore person). The seller’s main home exemption will not usually apply because the property is unlikely to be an offshore person’s main home if they do not live in New Zealand.
Home owners including landlords pay rates (council tax), but tenants do not. Rates are a ‘tax’ charged by local authority (or council) to help pay for the services they provide the community.
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
The transitional resident exemption which enables persons who become resident in New Zealand to receive the majority of their overseas sourced income tax-free for 48 months from the date they become tax resident. In most cases, this will enable domestic and overseas planning and structuring to take place over this transitional period. Care must be taken to ensure that overseas structures, such as trusts, that could be taxable in New Zealand on an individual becoming fully tax resident are not used.
The New Zealand transitional residence rules are available to New Zealand residents who have been absent from New Zealand for ten years. The rules do not apply to income derived from active business activities in New Zealand and provision of services overseas.
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
Families who intend to come to New Zealand as permanent residents must therefore take planning advice in advance of their coming to New Zealand. This is because it is possible to establish pre-migration structures outside New Zealand that can be used to hold families’ overseas investments and property.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
New Zealand's domestic law of wills is based on the English model. Wills are regulated by the Wills Act 2007. There is complete testamentary freedom. Wills are the only testamentary instrument recognized in New Zealand. New Zealand's intestacy rules are regulated by the Administration Act 1969.
New Zealand does not recognize overseas forced heirship rules.
New Zealand forced heirship rules are limited, they also do not recognise automatic inheritance. The rules relate to maintenance of dependents and the enforcement of pre-mortem provisions. They fall under two categories: testamentary promises, and family protection claims. Testamentary promises are regulated by the Law Reform (Testamentary Promises) Act 1949 (“LRTPA”).
The LRTPA enables a person who has been promised, for consideration, provision from a deceased person's estate to claim for the performance of that promise. The requirement of proof is high and few claims succeed.
The Family Protection Act 1955 was enacted to protect family members, in particular children or grandchildren, who are not given adequate maintenance and support by their parents' or, in some cases, grandparents' Wills. These rules do not apply to inter vivos trusts. In such a case the Court is entitled to adjust the testamentary provisions made by the Will to ensure that reasonable, adequate provision is made. The Courts have emphasized that this does not mean that a testator’s intention is to be overridden in all cases and there is no presumption of equality. The question always is whether during his life, and taking into account all the circumstances of the case, the testator has made adequate provision for the maintenance of a dependant. This type of claim is unlikely to be made by persons who are not resident in New Zealand.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
Marital property, known in New Zealand, as relationship property, is regulated by the Property (Relationship) Act 1976 (“PRA”).
Relationship property claims may be brought by persons who are married, in a civil union, or a de facto relationship. There is no difference as to whether the relationship is homosexual or heterosexual. Broadly, all property obtained during the relationship is divided equally. In respect of property which is brought into the relationship, an assessment will be made of any contributions the other party has made to the property after it was introduced.
A domestic relationship property agreement drafted according to the requirements of the PRA will be recognised in New Zealand. Foreign prenuptial agreements are not recognised in relation to New Zealand residents.
The PRA also applies when one of the couple dies. In that case, the surviving spouse or partner has the choice of either:
- having the relationship property divided under the rules in the PRA (by making a claim), or
- receiving whatever that spouse or partner is entitled to under the deceased's will or, if there is no will, under the statutory "rules of intestacy"
What factors cause succession laws to apply on the death of an individual?
New Zealand’s succession laws apply to a person who has property located in New Zealand or is living in New Zealand and has property located in New Zealand.
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
A New Zealand Will may be created by a non-resident, and it may apply to property situated in New Zealand or overseas. New Zealand will also recognise foreign Wills that deal with New Zealand property. There is provision for the resealing of a foreign Will in the New Zealand.
If a non-resident has property in New Zealand and dies without a Will which deals with that property, that property will fall to be regulated by the Public Trustee according to New Zealand's intestacy rules.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
A person that owns property located in New Zealand (including real property) should make a Will. If such person dies without a Will which deals with that New Zealand property, that property will fall to be regulated by the Public Trustee. The Public Trustee must deal with the property according to New Zealand’s intestacy rules as follows: in the first instance, to a surviving spouse, children and dependants. If there is no surviving spouse, children or dependants, the property is passed to the parents, failing which, brothers and sisters will inherit it. If there are no brothers or sisters, then the property passes to the grandparents, failing which the uncles or aunts. In the absence of any such heirs, the assets go to the government.
There is complete testamentary freedom. A person must be 18 years of age before they can make a Will. The formal requirements of a New Zealand Will are as follows:
- In writing and generally be in a specific format, and words of formality are required.
- At least two witnesses who are in the presence of the person making the Will. The witness must subscribe their full names, addresses and occupations.
- Each page of the Will must be signed by the testator or testatrix and the witnesses.
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
On the death of the testator, the Will must be proved by way of probate in the High Court. Generally, any claims made as to the validity of the Will or as to inadequate provision for family members must be made within six months of the Will being submitted to probate. Wills may dispose of all types of property capable of ownership, including overseas property. Wills commonly set up trusts which can operate for up to 80 years.
A Will can appoint a statutory trust company, or any person resident in or out of New Zealand as executor and trustee. The executor and trustee will be responsible for collecting assets, paying debts, and distributing to the beneficiaries.
Do the laws allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
Under New Zealand law a person may create such similar structures (except private foundations) for holding and administering family wealth and for estate planning purposes. New Zealand is not a signatory to The Hague Convention on Trusts. Its courts are therefore not required to take into account the customary or legal requirements of foreign jurisdictions in relation to trusts.
How is any such structure constituted, what are the main rules that govern it, is there any requirement for registration with or disclosure to any authority or regulator, and what information about the structure is available to the public?
Focusing on New Zealand foreign trusts (as opposed to domestic trusts) which are established by non-residents, the features and requirements are as follows:
- a trustee holds the trust assets for the beneficiaries described in the trust deed;
- a trust deed describes an equitable and contractual relationship between persons, which is regulated only by the courts;
- the trust is registered with the IRD (information is not publicly available);
- a trustee may be a natural person, company or a limited partnership. The trust may have any number of trustees;
- a New Zealand trust may hold property, trade or operate a business;
- a trustee must be a New Zealand resident to be trustee of an exempt trust;
- a trust can be terminated at any time; and
- the trust may operate for a maximum of 80 years.
Limited partnerships (“LPs”) are another structure often utilized by non-residents. They are registered and maintained in the New Zealand Companies Office, the following qualities apply to them:
- separate legal personality.
- registered office within New Zealand.
- at least one New Zealand resident general partner, however no limited partner needs to be a New Zealand resident.
- overseas LPs may register in New Zealand.
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
It is possible to establish New Zealand resident trusts which are exempt from New Zealand taxation. The key to the taxation of New Zealand resident trusts is the residence of the settlor rather than the residence of the trustees (unlike many other countries). Under a foreign trust, there is no income tax provided it is not New Zealand sourced.
Foreign-sourced amounts derived by a trustee, where there is no resident settlor, are generally not taxed in New Zealand (provided registration requirements are complied with by the resident trustee). Foreign-sourced amounts distributed to non-resident beneficiaries are also not subject to tax in New Zealand unless they are included in a taxable distribution made by a non-complying trust.
New Zealand LPs are transparent for tax purposes, the IRD will attribute the partnership’s activities to the underlying partners in proportion to their partnership interests. Provided the partnership does not carry on a business in New Zealand, the non-resident limited partner is not taxed in New Zealand, and the income of the partnership is attributable to the limited partner, then the partnership itself will not pay tax in New Zealand.
Are foreign trusts, private foundations, etc recognised?
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
The key to taxation of a foreign structure turns on the residence of the settlor/founder and the beneficiaries. Foreign structures established by New Zealand tax residents are taxed in New Zealand on their New Zealand sourced and worldwide income.
A foreign company which is owned by a New Zealand foreign trust (which by definition is tax-free) or a non-qualifying trust is not treated as a controlled foreign corporation (“CFC”) and is therefore not taxable in New Zealand on that basis.
In the first instance, provided the company is owned by less than 40% NZTR’s (in the case of individuals) and there are no other controlling interests from New Zealand, the company’s shareholders will not be treated as taxable in New Zealand on the company’s overseas income, except on income distributions.
Alternatively, if the company is owned by a vehicle which is treated as tax exempt in New Zealand, such as a New Zealand foreign trust, the company will be exempt from the CFC rules because, by definition, the shareholder is not taxable in New Zealand. It should be ensured that there are no other control interests in relation to the company which would otherwise make it taxable. By utilization of these structures, a New Zealand entity can hold part or the whole of the participation in a foreign company without incurring a tax liability in New Zealand.
To what extent can trusts, private foundations, etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
New Zealand does not have dedicated asset protection legislation. That is, in comparison with other countries, it does not have legislation which limits overseas creditors gaining recourse against assets in New Zealand. However, in practice, foreign creditor relief is extremely limited in New Zealand.
New Zealand’s creditor rules are contained in its Insolvency Rules. They apply to a New Zealand resident who has received assets or made disposals within two years of his or her insolvency, whether or not the transferee is in New Zealand. Such transactions may be set aside by the Official Assignee. The Official Assignee has the power to realise and recover assets for the benefit of that person’s creditors. With regard to a preferential payment, if it is made within six months of the date of an act of bankruptcy, then the transaction may be set aside without proof of an intention to defeat creditors. Otherwise the transaction may be set aside within the remaining 18-month period only if an intention to defeat the claiming creditor is proven. Outside of the two-year period, proof of fraud against creditors must be shown before a transaction can be set aside.
What provision can be made to hold and manage assets for minor children and grandchildren?
In addition to the tax and management advantages in relation to trusts, it should be noted that New Zealand trusts do not require probate and can provide extensive protective and guardianship provisions; the Trustee Act 1995 provides for special cases for the administration for spendthrift or special needs beneficiaries. Great flexibility is provided by New Zealand trusts in terms of distribution of income and capital to beneficiaries over the perpetuity period, and the capitalization and accumulation of income.
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
The definitions of mental incapacity can be found in section 94 of the Protection of Personal and Property Rights Act 1988. Under this Act, an enduring power of attorney (“EPOA”) can be granted to another person to act in relation to the donor’s property affairs, personal care and welfare if the donor becomes mentally incapable. The requirements for creating an EPOA are as follows:
- Execute an instrument appointing and EPOA in the prescribe form;
- Attach a certificate of mental incapacity;
- The instrument must be signed by the donor (or by someone directed by the donor in their presence), and by the attorney; and
- Both signatures must be witnessed by persons independent of both the donor and attorney.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Charitable trusts are common in New Zealand. They are governed by the Charitable Trusts Act 1975 and the Charities Act 2005, and they are tax exempt in New Zealand. A charitable trust can be either society or trust based, the main difference being that a society-based trust must have a minimum 5 people on its board and a set of rules or constitution under which it operates.
The definition of charitable purpose is broad; a charitable trust can be established to aid in the relief of poverty, the advancement of education or religion, or any other matter for public benefit. Charitable trusts must be registered with the Companies Office, and the trustees must apply to the IRD for the tax exemption.
What important legislative changes do you anticipate so far as they affect your advice to private clients?
New Zealand has committed to the second phase of CRS implementation under the OECD model. This means that New Zealand (through the IRD) will begin exchanging information about the source and beneficial ownership of entities from 1 July 2018. New Zealand will only provide financial account information to 58 reportable jurisdictions, starting with the 9-month period ending 31 March 2018 and annually from thereon.
The Trusts Bill currently before Parliament, it aims to modernise and clarify the trusts law regime and will replace the Trustees Act 1956 and Perpetuities Act 1964. In its current state, the Bill will extend the maximum trust period from 80 years to 125. Its main function is to codify many of the trust law developments since the Trustees Act, which currently exist in case law.