The Australian Taxation Office (ATO) has warned individuals and businesses who use New Zealand foreign trusts while earning their income from Australia that such arrangements are currently under investigation.
According to the ATO, promoters of these trust arrangements have marketed these structures on the basis that the trusts can accumulate Australian sourced income and capital on a tax-free basis, the ATO stated.
A trust is usually set up to provide administrative resources to an Australian business for a marked-up fee of around 20 to 30 per cent above cost. The fee (excluding mark up) is then paid to the trust to pay for the administrative resources, while the mark up is "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, the ATO said.
In another variation of the scheme, an Australian individual pays a fee for the services provided by the trust but "appears to have access to the fees paid" without reporting the income in Australia or New Zealand for tax purposes, the ATO added.
ATO tax commissioner Michael D'Ascenzo said such schemes are misleading because Australian and New Zealand tax laws are clear in describing the tax liabilities of individuals and businesses.
Under 'Taxation Ruling 2005/14', Australian individuals or businesses found to have participated in the schemes could have their returns amended, with penalties and interest, or face prosecution.
The ATO added that entities involved with marketing New Zealand Foreign Trust arrangements may be fined to $550,000 for an individual or $2.75 million for bodies corporate.
"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," D'Ascenzo said.
"The ATO has also informed the New Zealand Inland Revenue Department of the marketing of these schemes."
