Potential tax pitfalls for NZ trust beneficiaries living in Australia

Potentially taxable in Australia

Potentially taxable in AustraliaThe scope of what might be taxed in Australia is broader than one might think, including: 

• Distributions of income, capital or capital gains;
• Payments from such a trust;
• Assets transferred from the New Zealand trust;
• Loans from the New Zealand trust; and/or
• Use of assets owned by the New Zealand trust, i.e. a holiday home.

As discussed below, there are some exceptions and carve-outs that can eliminate or at least reduce the potential Australian tax liabilities. In the interests of brevity, we have simplified our explanations, so please appreciate that professional advice is essential wherever the trustees are dealing with a beneficiary living in Australia.

Temporary residents

The beneficiary’s visa status in Australia is important, as individuals qualifying under a special category visa (subclass 444) are “temporary residents” for Australian tax purposes. As such, they are generally not assessable in Australia on foreign-sourced income or gains distributed from a non-resident trust.

The subclass 444 visa has applied to most New Zealand citizens arriving to live in Australia since the early 2000s. However, a New Zealander with a spouse who is an Australian citizen or who is in a de facto relationship with an Australian cannot be a temporary resident. Also, it is worth noting that there is a new express path to Australian citizenship available for New Zealand citizens which could hasten the demise of their temporary resident status for tax purposes.

Carve-outs

For those Australian beneficiaries who are not in the temporary resident category, there are a few exemptions for trust distributions and payments, such as amounts that are:

• Sourced from gifts to the trust from individuals. 
• Sourced from capital gains that would not have been assessable to an Australian tax resident. The obvious example is a capital gain on an asset acquired by the trust prior to the commencement of Australia’s capital gains tax (on 19 September 1985).
• Loans or the provision of trust property on arm’s length terms.

The Australian Tax Office (ATO) has recently released guidelines in PCG 2024/3, which assist with the interpretation of the above exclusions, as briefly explained below:

Proof of source

For taxpayers who are asserting that an amount from a trust is (for example) sourced out of funds gifted to the trust by an individual, the PCG advises that the ATO would expect to see documentation relating to that prior gifting to the trust as well as substantiation of such source of the distribution such as financial statements and the trustees’ minutes relating to the distribution to the Australian beneficiary. 

Use of property

For the use of a house (for example), the ATO may require a copy of the rental agreement, evidence tracking the use of the property and some evidence of benchmarking to see that the amount charged for use of the property is reasonable in the circumstances.

Arm’s length loans

The ATO has stated that it will generally accept a loan with certain terms that are consistent with Australia’s ‘Division 7A’ rules, which currently means a term not exceeding seven years and an 8.77% per annum interest rate. 

Deceased estates

The distribution from a New Zealand estate to an Australian beneficiary is usually a non-taxable gift for the recipient. But there are conditions, one of which is that the gift can only include assets up to the value held by the deceased at the time of their death. 

Consequently, income and gains accrued after death can form part of the assessable income of an Australian beneficiary. But there is some tolerance from the ATO where the distribution is within 24 months of the date of death and the total value of trust property received by the resident beneficiary does not exceed AUD $2m.

Conclusions

It would be a mistake for any beneficiary living in Australia to assume that the ATO will not become aware of a distribution or loan to them from a New Zealand trust. The ATO actively monitors large incoming payments to Australia. In addition, New Zealand’s Inland Revenue shares a significant amount of information with the ATO, including information gathered from our enhanced trust disclosure rules in New Zealand.

Therefore, Australian beneficiaries of a New Zealand trust would be wise to check their visa category and get professional confirmation in Australia of their status as temporary residents (or not, as the case may be). The New Zealand trustees should also be informed, so that all involved have an appreciation of the potential tax implications for payments or benefits provided to that beneficiary.