The New Zealand tax system was until recently so structured as to allow foreigners to use the country as a tax haven. Specifically, it allowed them to use trusts established in New Zealand (referred to as “foreign trusts”) to avoid and evade the tax they would otherwise have had to pay in their home country. It would seem to have been possible, too, for foreigners to use such trusts for other illicit purposes, in particular money-laundering and financing terrorism. In April 2016 the publicity given to the Panama Papers attracted attention to this aspect of the New Zealand tax system. The government responded by appointing a distinguished accountant, John Shewan, to advise. He recommended that the law be changed and the government accepted his recommendations. This paper explains how the foreign trust rules work, and how the amending legislation was designed to preclude this form of abuse.

Sections 226 to 233 of the New Zealand Income Tax Act 1976 contain a special regime for the taxation of trusts. Income that is distributed by the trustee is taxed in the hands of the beneficiary, and income that is accumulate is taxed in the hands of the trustee. The regime contains a number of provisions that are designed to prevent people using trusts to avoid tax on New Zealand source income or to relieve New Zealand resident beneficiaries from tax they might otherwise have to pay. On the other hand, the regime is carefully crafted so that the mere fact of trustees' being resident in New Zealand does not attract tax.

This book identifies a set of principles and corresponding tax settings that countries may apply to cross-border income derived by, through, or from a trust and will appeal to international tax practitioners, administrators, policymakers, academics, and students.

The leak of the Panama Papers received worldwide media coverage. Media reports asserted that wealthy individuals were using New Zealand foreign trusts to hide money laundering and other illegal activities. This article examines the New Zealand Government's response to the Panama Papers. It includes background on the foreign trust regime and considers the proposed legislative response to deal with issues arising from an independent review of that regime. The implementation of the proposed legislative response in its current form will give rise to issues including increased compliance costs for trusts and their advisers, and concerns around confidentiality of information provided to New Zealand tax authorities. Those wishing to establish foreign trusts will need to consider whether the benefit of doing so outweighs such costs and risks. The autors conclude that the changes to the foreign trusts rules are simply part of the growing demand and momentum toward global transparency in fiscal affairs.

The trust is the most useful device that New Zealand offers to non-residents in the field of international tax planning. So long as settlors, beneficiaries, and income are all foreign the trust is unlikely to attract New Zealand tax. The residence of the trustee has no effect on the tax benefits of the trust so long as the former requirements have been met. This has been the case since 1988. Increasingly Australian planners have employed New Zealand trustees to hold investments in superannuation funds, a strategy that is thought to avoid Australian tax. In addition to Australians, people from many countries employ New Zealand trusts to hold their investments.

New Zealand's trust regime has made global headlines recently in the wake of the "Panama Papers", and revelations that the country's trusts featured in structures that may have been used to evade foreign taxes. These headlines underscored the complexity of the trust regime, particularly when trusts are used in cross-border settings. Inland Revenue has moved to provide further guidance in this area and trusts generally with a new draft interpretation statement on the taxation of trusts.

Sections HH 1 and HH 8 of the New Zealand Income Tax Act 1976 contain a special regime for the taxation of trusts. Income that is distributed by the trustee is taxed in the hands of the beneficiary, and income that is accumulated is taxed to the trustee. The mere fact of the trustee being resident in New Zealand does not attract tax, instead the regime takes a substantive, economics-based approach to the taxation of trusts. This article outlines the effects of this regime on people wishing to use a trust in New Zealand as a vehicle for foreign investment. As at 2009, the special regime for the taxation of trusts in the 1976 Act appears as subpart HC of the Income Tax Act 2007. Sections HC 17-HC 23 deal with the tax treatment of amounts that beneficiaries receive from a trust, sections HC 24-26 with the tax treatment of trustee income and sections 27-29 with the tax treatment of settlors. Section CV 13 makes it clear when these amounts will be “income”