Common reporting standards for Trusts – a brief explanation…

Are you are a trustee, beneficiary or settlor of a trust or have an investment portfolio managed for you or are involved in a company that is handling money for clients?

If so you are likely to receive, if you have not already, some self-certification forms to complete and sign.  These forms require you to state details of the countries in which you pay tax and your tax number for each of those countries.

This is a result of the New Zealand Government committing to implement common reporting standards (CRS) to enable a number of participating countries throughout the world to collect, report and exchange financial account information about people that invest outside of their tax jurisdiction.  In turn, this enables those countries to detect and deter any off-shore tax evasion.

Under the CRS rules every entity, including every trust, will either be a Financial Institution or a Non-Financial Entity.  For trusts, if the trust derives 50% or more of its gross income (over the past 3 years ending 31 March) from financial assets (being shares, units, bonds, swaps, loans, money but excluding physical land assets) AND the trust or a financial asset is managed wholly or partially by a Financial Institution that is in business (e.g. lawyer, accountant, bank, share broker) then the trust will be a Financial Institution by virtue of being a managed investment entity.  If one or more of the trustees is a New Zealand tax resident then the trust will be a New Zealand Financial Institution (NZFI) and unless the trust is reporting for CRS purposes in another jurisdiction then it will be a Reporting NZFI.

Every Reporting NZFI will have due diligence and reporting obligations. Part of the due diligence requirements will be to have every person who has received the benefit of any payment or transaction with the trust complete and sign self-certification forms.  This might include a distribution from the trust to a beneficiary or a loan to the trust by a settlor but will not include the sale or purchase of land by the trust.

Each Reporting NZFI must review all of its transactions to identify any accounts held or controlled by (or benefits received by) foreign tax residents and must collect prescribed identity and financial information about such persons.  This needs to be done every year by every account holder (or recipient of a benefit) as the tax status of the individuals may change during a tax year. This means even if you know the person is only tax resident in NZ they still must sign a self-certification form just in case there has been a change in their tax status.  If any of the due diligence enquiries reveal that an account holder is a foreign tax resident then that must be reported to Inland Revenue.  Similarly, if any account holder does not sign and return their annual self-certification form then that must also be reported to Inland Revenue.  All reports must be made to Inland Revenue by 30 June each year.

The CRS rules are complex and will take some time for people to understand fully.  Please feel free to discuss these further with any of our Trust Lawyers if you have any questions.