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Settlors & Transferring Value To A New Zealand Trust

Settlors & Transferring Value To A Trust-2
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Settlors & Transferring Value To A Trust-2

The trust rules in New Zealand are a settlor-based taxation regime. Income derived by trustees is taxed based on the residence of the settlors, rather than the residence of the trustees. It is therefore of significant importance to be aware of the actions of a person that may result in that person being treated as a settlor of a trust.

Definition Of Settlor

A "settlor" is a person who transfers value to a trust. This article will provide an overview of this meaning and those activities that result in a person being treated as a settlor.

Transfer Of Value

A settlor of a trust is a person who, at any time, transfers value to the trust, or for the benefit of the trust, or on the terms of the trust.

Market Value

A transfer of value to a trust can also occur where a transaction occurs between a person and a trust and the trust does provide something in return. For example, if there is a transfer of value from a person to the trust at below market value the trust acquires the full market value.

Related:

Release of Obligation to Pay

The release of an obligation to repay money may also be treated as a transfer of value. For example, where a person loans money to a trust and then forgives the loan, the person may be treated as a settlor of the trust and they transferred value to the trust. Where the obligation to pay has no value, it will not be treated as a transfer of value.

Transfer of Value by a Company

A company may be deemed to have transferred value to the trust if it provides services to the trust for less than market value.

Providing Services To A Trust

This includes any investment advisory services, legal and accounting services, or services relating to any business carried on by the trustees of the trust at below market value.

Providing Financial Assistance

A person is a settlor of a trust if they provide financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred.

Other Considerations:

Shareholders In Controlled Foreign Companies (CFCs)

A person is treated as a settlor of a trust if a controlled foreign company (CFC) settles an amount on a trust and the person has a control interest of 10% or more in the CFC.

Second Trust/ Resettlements

A person is treated as a settlor of a trust (the sub-trust) if they are a settlor of a trust (the head-trust) and a trustee of the head-trust settles an amount on the sub-trust, or makes a distribution to, or on terms of the sub-trust.

Nominee Settlor

A person may be treated as a settlor if someone else settles a trust as nominee for the person.

Control Over Trustee Or Settlor

A person is treated as a settlor of a trust if they acquire rights or powers in relation to a trustee or a settlor of a trust

Avoidance Provisions

A person is treated as a settlor if, in relation to a trust, they act, refrain from acting, or enter into a transaction or a series of transactions which has the effect of defeating the intent and application of the trust rules.

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