NZ has hybrid type trusts?

[GreatPig]

Just wondering, does NZ have trust structures similar to Australia's hybrid trusts?

These are a combination of a discretionary and unit trust rolled into one, where income units can be purchased providing a right to income but capital gain can be distributed elsewhere using the discretionary aspect of the trust.

Also, I gather with a NZ trust you can retain profits in the trust (ie. not distribute them) and they will be taxed at 33%. If then you retain capital gains in the trust, since NZ doesn't have capital gains tax (assuming "investment" rather than "trading") does that mean they would also be taxed at 33% or not at all?

Thanks.

GP

[Marc]

Hello!

Just as a matter of reference here is a link to our Trusts section below. I am sure someone will answer your question as well!

http://www.propertytalk.co.nz/content-cat-3.html

Cheers

Marc

[GreatPig]

Marc,

Thanks for the link. I have read through all those before though, and don't recall them talking about anything other than a standard family discretionary trust.

The problem I have is that I think I'd need the unit aspect of a trust to be able to supply funds to the trust from an Australian company without the ATO considering it a distribution (ie. dividend) or director's loan. Essentially the company would need a right to income from its investment, which it wouldn't have just as a discretionary beneficiary.

On the other hand, a pure unit trust is not so good either as I don't want the company to have any right to capital gains.

I have the same issue here in Australia, and a hybrid trust achieves both of these things (ie. a right to income but not capital gain).

An alternative for me would be to supply funds to a NZ trust from the Australian hybrid trust, but I have yet to look into how that could be done and what issues there might be with it.

GP

[masteraccountants]

Hello,

I think that you may be trying too hard to second-guess the ATO. There are situations that the ATO will make those kinds of judgements about moneys loaned to individuals where no loan agreements are written up or loan payments actioned in fact.

Where moneys are loaned to other entities, such as Trusts and Companies, the ATO does not apply the same rules as for individuals. My information is current to the year 2000, when I was a CPA accountant in public practice in Australia. A Trust or Company is not an employee within the definitions of employees, so there are no FBT issues.

Then the question turns on whether a sum of money sent to a Trust in New Zealand is a loan or an investment. So there may not have to be the issue that you are considering for your company in Australia.

On the NZ side, there is no CGT in New Zealand, so the Trust would not be taxed on the capital gain unless the Trust is in the business of dealing in property, that is a property developer or builder. If it is an investor in property, there is no tax on the capital gain.

If the Trust does not distribute the capital gain to your company in Australia, then your company does not pay tax on the capital gain. There is nothing preventing the Trust distributing capital back to your company in Australia, and that is not taxed in Australia - as long as it is not sourced from the capital gain. Capital distributions could be funded from non-cash expenses that reduce the tax payable but not the bank account balance.

In short, there are no hybrid trusts in New Zealand to my knowledge. But then we don't need them as we don't have to circumnavigate CGT issues.

Does this help you?

[GreatPig]

Thanks a lot for the reply. It was very helpful.

I think that you may be trying too hard to second-guess the ATO

Probably , but these issues of directors' loans and deemed dividends keep getting mentioned nearly every time I suggest some way of using the company cash. I'm just trying to ensure I don't get an unpleasant surprise in the way of a big tax bill.

Where moneys are loaned to other entities, such as Trusts and Companies, the ATO does not apply the same rules as for individuals.

Okay, I was wondering about that. Since the company would not be borrowing money, and thus would not have to worry about claiming a deduction for interest, then I think the main issue is that the ATO doesn't try and say that the company giving money to a NZ trust is really me taking the money out of the company and personally loaning it to the trust (ie. a deemed dividend).

As for loan vs buying units, it seems to me the best option would depend on whether the expected income is likely to be higher or lower than the interest rate charged with a loan. For lending to the Australian trust I'm currently favouring buying units, but it looks like this is not an option with NZ trusts.

If the Trust does not distribute the capital gain to your company in Australia, then your company does not pay tax on the capital gain.

And if not distributed at all - even to a NZ beneficiary - then there's no NZ tax either?

So if a NZ trust is being used for growth investments (ie. mostly capital gain), then there's no need to distribute anything - and thus really even no need for any beneficiaries other than to one day get the money out, and of course to satisfy legal requirements of the trust structure?

[edit: I just saw your comment in another thread which has effectively answered this]

Thanks again.

GP