NEW ZEALAND Law and Practice Contributed by: Violet Yu, Jonathon Russell and Sandy Chen, Cone Marshall Limited
4. Family Business Planning 4.1 Asset Protection
• New Zealand foreign trusts can be an effective ownership vehicle for non-residents to hold off - shore assets, tax-free. • Trusts can be effectively paired with limited part - nerships, improving offshore flexibility. • In circumstances when a settlor wishes to become a New Zealand resident, the four-year transitional residency period can be used to avoid non-com - plying status, avoiding 45% tax. Consider distributing income to lower-taxed benefi - ciaries (applying the beneficiary’s marginal tax rate rather than the flat trustee rate of 39%). However, this is subject to the minor beneficiary rule, which imposes the trustee tax rate on income distributed to benefi - ciaries under the age of 16 if it exceeds NZD1,000 per year from trusts settled by related parties. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles In New Zealand, there are no specific tax charges that arise solely because a beneficiary or donor of a trust also serves as a fiduciary (for example, as a trustee). Trust taxation is driven by the settlor-based regime – whether a trust is complying, foreign or non- complying – and by the source of income, rather than by whether a person holds overlapping roles. Where a donor retains significant powers as trustee, Inland Revenue will scrutinise whether there has been a genuine divestment and who should be treated as “settlor” for tax purposes, including in relation to inter - est-free loans or debt forgiveness. In extreme cases where the structure is a sham or alter ego, income and gains can be taxed directly to that individual rather than under the ordinary trust rules. By contrast, a beneficiary who is also a trustee is taxed on trust distributions in the usual way (benefi - ciary’s marginal rates for income, generally no tax on capital; 45% for non-complying trust distributions), with the fiduciary role itself not altering those basic outcomes.
Trusts are widely regarded as the most popular meth - od for asset protection in New Zealand due to their versatility, robust legal framework and ability to shield assets from various risks. It is estimated that New Zealand has between 300,000 and 500,000 trusts, against a population of approximately five million. However, transfers to trusts can be set aside under relationship property and creditor-protection legisla - tion. For example, this may occur where assets are settled to defeat a partner’s rights under the Prop - erty (Relationships) Act 1976 or to prejudice creditors under the Property Law Act 2007 and related insol - vency provisions. Excessive settlor control or failure to observe and uphold trustee duties can also invite “sham” argu - ments, with the risk that assets are treated as still owned personally rather than by the trust. 4.2 Succession Planning Trusts are often regarded in New Zealand as the cor - nerstone of family business succession planning, with the “dual trust structure” being popular for holding business interests, safeguarding family assets and providing a clear mechanism for transferring wealth and control across generations. A well-considered succession plan can optimise tax and minimise the potential for inter-family conflicts. The dual trust structure typically takes the form of a “business trust”, which holds shares in a trading com - pany or other business interests, sitting alongside a separate “family trust”, which holds personal assets and can benefit family members directly (especially when doing so from the business trust is not desir - able). For blended families, multiple family trusts can be formed and appointed as beneficiaries of the busi - ness trust, if deemed necessary or prudent, allowing for equitable distributions across the family and mini - mising the potential for disputes to arise.
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