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Trusts caught in FATCA net

New rules require many family trusts to register with United States authorities if they want to use managed funds or discretionary investment management services.

Thursday, November 12th 2015, 6:00AM 5 Comments

by Susan Edmunds

The Foreign Account Tax Compliance Act (FATCA) has come into force in New Zealand over the past 18 months.

The Act requires financial institutions around the world to provide information about customers who are United States “persons” to the IRS.

But a guidance note issued by the IRD makes it clear that family trusts in this country become financial institutions, with associated FATCA requirements, when they use professional investment management services, even if no one involved in the trust is a US citizen.

There is a small amount of relief available to trusts under the US Treasury rules but only if the income from professionally-managed investments is less than 50 per cent of the trust’s income.

They need to obtain a global investor ID number and use it in any future dealing with other financial institutions, register with the US and report on changes to trustees and beneficiaries of the trust.

Mike Newton, of Newton Ross, said: “It’s insanity. They can’t possibly think this is a good outcome for New Zealand.”

He said many family trusts might not even realise they were not compliant with the rules. 

Newton said there was a risk those trusts might decide that it was not worth the hassle of dealing with a fund manager or investment adviser, and opt to invest directly to avoid the FATCA rules.

Vivian Cheng, a senior associate at Chapam Tripp, said even family trusts with small investments were caught.  “Just because you hold less than a certain dollar value doesn’t save you.”

She said it sounded onerous but compliance might not be too big a burden.

“They only have to carry out due diligence in respect of their accounts if there are any trustees or beneficiaries who are US persons. Then the account becomes reportable. If not they only have to register... some people just don’t want to register in the first place because they wonder what that means.”

Tags: FATCA investment trusts

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Comments from our readers

On 12 November 2015 at 10:03 am Curious said:
This is bizarre. Susan do you have a link for the IRD guidance note?
Anyone have any idea what the implications would be if a Trust didn't comply?
On 12 November 2015 at 3:55 pm gavin austin adviser business compliance said:
Hi Curious

Yes it is a bit and there are reasons for it that are not always obvious to us mere mortals. I’d suggest its all about the US IRS sick of not getting its fair share of taxes from US citizens hiding funds all over the place.

IRD web site is quite good so go there and type in the search function the word FATCA – FATCA Guidance notes are 59 pages long – there’s a good little one pager though called “FATCA status of NZ Trusts that are not U.S Persons”.
Most Trusts won’t have any problems but good advice should be sought.
Good luck.
On 13 November 2015 at 7:53 am MPT Heretic said:
Having just read the latest IRD discussion paper it is not clear at all what the impact will be on most trusts. Using one of the IRD examples, a typical family trust which has the family home and any accumulated savings at all may be deemed to be an investment entity if the trust outsources the management of its investment portfolio (even if that is just a few $ if it has no other income) to a fund manager.

Outsourcing to a fund manager would appear to include investing in a managed investment scheme such as a PIE....even a Cash PIE. If this indeed the case then most trusts in NZ would currently be non-compliant
On 13 November 2015 at 8:51 am w k said:
could be somebody is going to make a lot of money fighting all these haze.
On 13 November 2015 at 9:27 am Curious said:
Hello MPT. I agree that the guidance is not clear. The IRD talk about the outsourced manager having a mandate to buy and sell on behalf of the Trust. As far as I can see there is no mention of whether a PIE or several PIE investments meet that definition.

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