Australian individuals and businesses who use ‘New Zealand Foreign Trusts’ while earning their income from Australia are being cautioned by the Australian Taxation Office (ATO) to be careful of these arrangements as they are currently under investigation, including under Project Wickenby.
Tax Commissioner Michael D’Ascenzo said the ATO had issued the warning because promoters of the scheme have been marketing it as a way to accumulate Australian sourced income and capital on a tax-free basis because of taxation agreements between Australia and New Zealand.
“However, we think this is incorrect and misleading,” Mr D’Ascenzo said.
The scheme involves establishing a New Zealand Foreign Trust to provide administrative resources to an Australian business for a fee which usually includes a mark up (typically 20-30% above cost). The fee, excluding the mark up, is paid to the trust and is then used to pay for the administrative resources.
The mark up may be paid indirectly by the business to the owner of the business. The income, including the mark up, is not reported in Australia or New Zealand for tax purposes.
In a variation to this arrangement, the trust provides the services of a particular Australian individual for a fee. The individual appears to have access to the fees paid to the trust. The income is not reported in Australia or New Zealand for tax purposes.
“We have so far identified these trusts being established in countries such as Panama, Samoa, Vanuatu and Hong Kong. These trusts are then administered from New Zealand,” Mr D’Ascenzo said.
“Despite claims by people promoting the scheme, Australian and New Zealand tax laws clearly spell out the tax liabilities of individuals and businesses.
Participants in the schemes could have their returns amended, with penalties and interest or face prosecution. The ATO has provided their view on New Zealand Foreign Trusts in Taxation Ruling TR 2005/14.
“TR 2005/14 is on our website which has a wealth of information to help people to meet their tax and super obligations. In addition, if people need further assistance, they can contact the ATO to speak to an experienced advisor about their own particular circumstances,” Mr D’Ascenzo said.
Taxpayers who wrongly claim deductions or fail to report assessable income face amendments to their returns with penalties and interest. Entities involved with marketing New Zealand Foreign Trust arrangements may face penalties of up to $550,000 for an individual or $2.75 million for bodies corporate.
If taxpayers make a voluntary disclosure of these arrangements they will be entitled to an 80% reduction of any administrative penalties that might apply.
“The ATO has also informed the New Zealand Inland Revenue Department of the marketing of these schemes, ” Mr D’Ascenzo said.
“Australia maintains very close liaison with New Zealand on tax avoidance and evasion arrangements. The two countries regularly exchange specific and detailed information on such schemes and related promoters under Article 26 of the NZ
Agreement.”
