New Zealand

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*Updated July 2020*

Editorial Board

John W Hart TEP, Barrister and Notary Public, Auckland, New Zealand

Important new developments

The Trusts Act 2019 was enacted on 30 July 2019. It comes into effect on 30 January 2021. It replaces the Trustee Act 1956 and the Perpetuities Act 1964.
The Overseas Investment Act 2005 (the 2005 Act) was amended, effective from 22 October 2018, to restrict the ability of overseas persons who are not resident in New Zealand to buy existing houses or other parcels of residential/lifestyle land.
In July 2019, the Minister Responsible for the Law Commission requested that the Commission review succession law. This follows on from the Law Commission’s report on the Property (Relationships) Act 1976. In that report, the Commission recommended that a person’s property rights when their spouse or partner dies should be considered as part of a separate and wider review of succession law.
The existing overseas investment framework in New Zealand does not ordinarily require approval for acquisition of business investments of less than NZD100 million (or higher where a free trade agreement applies). In response to the impact of COVID-19, amendments in 2020 to the 2005 Act put in place a temporary requirement for foreign investors to notify an intention to make an investment in any New Zealand business, if that results in more than a 25 per cent ownership interest, or increases an existing interest to or beyond 50, 75 or 100 per cent. This is designed to protect key New Zealand assets from falling unnecessarily into foreign ownership as the economy recovers from the fallout of the global COVID-19 pandemic.

Legal system

Common law.

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Inheritance and succession

Succession

Testamentary freedom is a core principle for succession purposes, although there are some statutory bases for seeking to challenge the terms of a will.

Key legislation includes:

Wills Act 2007.
Administration Act 1969.
Family Protection Act 1955.
Law Reform (Testamentary Promises) Act 1949.
Property (Relationships) Act 1976.

Family law and defined inheritance rules

Defined inheritance rules apply in the case of an intestacy.

Probate process

An application for a Grant of Probate of a will is made to the High Court of New Zealand. In the case of an intestacy, an application for Grant of Letters of Administration is also made to the High Court. In both cases the relevant statute is the Administration Act 1969.

Mental capacity

There is no statute that expressly deals with mental capacity in the testamentary context. Capacity may be challenged based on medical advice and taking account of common-law principles (for example Banks v Goodfellow). The determination of mental capacity for the purposes of ascertaining if a valid will has been created involves addressing the following questions:

Does the will-maker fully understand that they are making a will, disposing of property in the event of their death?
Does the will-maker understand what property they are dealing with?
Does the testator comprehend the potential claims of their close relatives to the will-maker’s property?
Is the will-maker free from any abnormal state of mind which might distort their judgment in the making of the will?

Undue influence is also to be considered in determining if a will is validly made.

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Estate planning

Use of trusts in estate planning

Trusts are very common in New Zealand. As New Zealand has no estate duty or gift duty, the use of trusts is driven by a concern to achieve an orderly succession to assets and to preserve assets for future generations. Protection against claims by creditors or spouses of descendants is a common feature of this strategy.

Use of foundations in estate planning

Foundations are not generally used in New Zealand, as there is no domestic foundation law. An incorporated civil-law foundation would be categorised as a company rather than a trust under New Zealand law.

Types of entities

Companies, including ‘look-through’ companies used in tandem with discretionary trusts, and testamentary trusts. Fixed trusts or unit trusts are not commonly used for estate-planning purposes.

Legislation requires New Zealand companies to have a New Zealand-resident director. Similar rules also apply to general partners of New Zealand limited partnerships. An exemption will be available if a director is resident in an ‘enforcement country’ and is also a director of a company in that country. Presently Australia is the only enforcement country.

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Taxation

Income tax system

New Zealand residents are taxed on worldwide income. Non-residents are taxed on New Zealand-source income.

The government introduced law changes in May 2015 to improve tax compliance in the property investment sector. The proposals, which are not aimed at the main family home, include:

A New Zealand Inland Revenue Department (IRD) number will be required as part of the land-transfer process.
As part of the land-transfer process, non-resident buyers and sellers must also provide their tax identification number from their
home countries.
Non-residents will also need a New Zealand bank account before they can get an IRD number in order to buy a property.
Gains from residential property sold within five years of purchase will be taxed (for properties purchased on or after 29 March 2018), unless the property is the seller’s main home, inherited from a deceased estate or transferred as part of a relationship property settlement. This 'bright-line' tax regime was introduced originally on 1 October 2015, applicable to properties sold within two years. A withholding tax regime was also introduced in 2016 to bolster this regime.

Personal income tax rates

Up to NZD14,000: 10.5 per cent.
From NZD14,001 to NZD48,000: 17.5 per cent.
From NZD48,001 to NZD70,000: 30 per cent.
NZD70,001 and over: 33 per cent.

Trusts: flat rate of 33 per cent; however beneficiary income is taxed to the beneficiary not the trustee, at the beneficiary’s applicable tax rate.

Foreign trusts settled by non-residents are only taxable in New Zealand on New Zealand-source income.

Corporate income tax rates

Flat rate of 28 per cent.

Capital gains tax

No capital gains tax (CGT), but certain gains are characterised by statute as income. For example foreign exchange gains on debt instruments; gains captured by the bright-line regime; and speculative real estate gains, are taxed as income. Broadly speaking such gains can be categorised as arising from revenue account property.

Non-residents taxable on

New Zealand-source income, at the rates given above, unless non-resident withholding tax (NRWT) applies (dividends, royalties, interest) and the NRWT is a final tax. Non-resident contractors performing services in New Zealand may be subject to a withholding tax (usual rate of 15 per cent) if paid by a New Zealand resident principal. This may be a minimum rather than final tax in the absence of DTA relief. Non-resident employees performing services in New Zealand may be subject to tax deducted as PAYE by employers.

Withholding tax rate (non-treaty)

15 per cent interest and royalties: 30 per cent dividends, in some cases 15 per cent or zero.

Withholding tax rate (treaty)

These vary, but mostly, interest 10 per cent; dividends 0, 5 or 15 per cent; royalties 10 or 15 per cent.

Taxation at death

Nil: other than in respect of revenue account property (for example, trading stock), which will be deemed to have been disposed of at market. Some concessions when close relatives inherit.

Other taxes

Goods and services tax (GST/VAT), but no wealth/CGT/inheritance taxes.

Tax treaties

Forty full double taxation agreements in effect; four more in negotiation.

Tax information exchange agreements (TIEAs)

Nineteen TIEAs in effect; two signed but not yet in force, and possibly others in negotiation.

Multilateral conventions

New Zealand is a party to:

The Convention on Mutual Administrative Assistance in Tax Matters;
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting;
The Foreign Account Tax Compliance Act; and
The automatic exchange of information, under the Common Reporting Standard.

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Residence and domicile

Special rules on becoming resident

A first-time resident, or a returning expatriate who has been absent for a continuous period of ten years or more, is entitled to a transitional resident tax exemption. With very few exceptions (for example, income from employment or provision of services), all foreign-source income of the transitional resident is exempt of tax in New Zealand, even if remitted into New Zealand. Concessions also apply in respect of the transitional resident’s interests in controlled foreign companies, foreign investments funds and offshore trusts.

Special rules on ceasing residence

Financial arrangements subject to the financial arrangement rules may be subject to a ‘mark to market’ treatment when an individual leaves as they will no longer be subject to those rules. This may trigger taxable income arising from the deemed disposal of the financial arrangements.

Consideration needs to be given to the tax status of any trusts settled by the ex-resident, as a New Zealand trust may become exempt of tax on New Zealand-source income once the individual has been non-resident for a full fiscal year. Careful planning is required.

Domicile concept for gifts and inheritance

No longer relevant since the abolition of gift duty in 2011.

Taxation of holdings by non-residents on death and of gifts

None, except in respect of the disposal of revenue account property, for example, trading stock. Some concession on death if assets pass to close relatives.

Reporting/auditing requirements

For financial years beginning on or after 1 April 2014, a New Zealand company (other than a subsidiary of an overseas company) does not have to be audited unless it is considered ‘large’ (ie satisfies at least one of the following two conditions: total assets exceed NZD60 million; total revenue exceeds NZD30 million). For a subsidiary of an overseas company, these thresholds are reduced to NZD20 million and NZD10 million respectively. A large New Zealand company with 25 per cent or more overseas ownership must file audited accounts with the Registrar of Companies; these accounts will be publicly available.

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Other relevant information

Asset protection laws

There is no specific legislation enabling so-called asset protection trusts. However, principles derived from the Statute of Elizabeth broadly apply under the Property Law Act 2007. Dispositions to trusts may be set aside in very limited circumstances, for example where there is an intent to defeat the interest of a creditor, or where a disposition renders the donor insolvent.

Foreign currency restrictions

None, just a reporting obligation in respect of cash movements greater than NZD10,000 (for AML purposes).

Foreign ownership restrictions

In respect of residential/lifestyle land, land of historic or natural significance, land adjacent to the seabed or foreshore, land subject to heritage order or historic places trust registration or adjoining parks and reserves, land on the coastal islands of New Zealand, quotas for fishery resources, larger holdings of land (greater than five hectares) or local business assets greater than NZD100 million in value. In all these cases consent from the Overseas Investment Office is required. In response to the impact of COVID-19, amendments in 2020 to the 2005 Act put in place a temporary requirement for foreign investors to notify an intention to make an investment in any New Zealand business, if that results in more than a 25 per cent ownership interest, or increases an existing interest to or beyond 50, 75 or 100 per cent.

AML/due diligence and other requirements and regulatory procedures for advisors

To establish a trust.
For incorporation.
To open a bank account.

Yes to all. Usual proof of identity; identification of trust beneficiaries; and in some cases confirmation of source of funds/wealth.

Key resources for further information

WEBSITES

Inland Revenue Department: www.ird.govt.nz
Institute of Chartered Accountants: www.nzica.co.nz
IRD Policy Advice Division: www.taxpolicy.ird.govt.nz
Ministry of Economic Development: www.med.govt.nz
Ministry of Justice (AML matters): www.justice.govt.nz
Department of Internal Affairs (AML): www.dia.govt.nz/AML-CFT-Homepage
New Zealand Government Online: www.newzealand.govt.nz
New Zealand Law Society: www.lawsociety.org.nz

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