With more and more South Africans seeking greener pastures abroad, it’s vital to ensure that your estate planning is set up in a way that prevents nasty tax surprises. This week’s focus on New Zealand is the first in a series of articles that will cover tax implications for non-residents.
Significant Tax and Exchange Control complexities can arise when a beneficiary of a South African discretionary trust moves abroad and ceases their South African tax residency. Add to this the complexities surrounding taxation of offshore Trusts in the new jurisdiction and you could end up with a perfect storm of taxation (if you’re not careful).
Be aware of recent changes to legislation in NZ
The New Zealand government has recently made changes to legislation surrounding the taxation of offshore trusts. If you, or any of your family members, live in the Land of the Long White Cloud, now is the time make sure you’re up to date with these changes and how they could potentially impact your estate planning.
The tax status of trusts in New Zealand and the tax treatment of distributions to beneficiaries is primarily determined by the following:
- the residence of the Settlor at the time a settlement is made to the Trust
- the residence of the Settlor at the time foreign income is received
- the residence of the beneficiary at the time of a distribution
- the deemed source of the distribution
What’s a Settlor?
Good question. The definition of a “Settlor” is very wide and includes anyone who transfers value to the Trust or provides services to the Trust for less than market value. It also refers to anyone who provides financial assistance to the Trust and defers their right to demand payment.
Legislation has just been introduced in New Zealand (effective 1 April 2020) that states that the monies owed to beneficiaries by a trust will be regarded as settlements if:
- a prescribed interest rate is not charged and paid to the beneficiary; or
- if the balance of the amount owing to the beneficiary is more than NZD25,000.
What does this have to do with me and my family?
Fundamental and common South African planning principals with regards to Trusts (such as the conduit principle) can really work against a beneficiary once he/she becomes a New Zealand resident.
As soon as the beneficiary becomes a New Zealand resident, the Trust will be seen to have a Settlor who is a New Zealand resident. This means that, at the time of settlement, the Trust will be subject to New Zealand income tax on its global income. If the trustees do not satisfy the New Zealand tax liability, the New Zealand resident beneficiary will become personally liable to pay it.
This applies to me. What next?
Trustees of SA trusts with New Zealand-resident beneficiaries owed more than NZD25,000 by the Trust should act as quickly as possible to ensure that the Trust does not inadvertently become exposed to New Zealand income tax on global income.
In today’s increasingly globalised world, the fiduciary responsibilities of trustees in South Africa stretch way beyond our borders. This means that professional service providers need to ensure they keep abreast with not only only domestic law changes, but also international changes and trends.
If you’re at all concerned about where this leaves you and your family, the team of experts at Sentinel International will gladly review your situation. Contact us on the following numbers:
Johannesburg: 011 656 2722 Pretoria 012 349 5176 Cape Town: 021 674 0309
Stay tuned for the next article where we’ll discuss how distributions to non-Residents are taxed by SARS, as well as the lesser known Exchange Control implications of distributions to non-Residents.
By: Shaun Eastman, Admitted Attorney, Trust Executive/Cross-border Tax Specialist