Keynote speech to NZ Law Society members on Cross-border taxation issues. February 2019 Continuing Legal Education

1. Terry Baucher
February 2019
Copyright reserved: This presentation or any portion thereof may not be reproduced without the express permission of NZLS CLE Ltd.
Cross-border taxation issues –
stepping into the unknown

2. “A Brave New Tax World”
All change in attitudes since GFC in 2008
First FATCA, now AEOI/CRS, tax authorities
freely exchanging information
Also AML/CFT – EU 4th AML directive
All may have unforeseen consequences for
clients

3. “Here There Be Monsters…”
Capital Gains Tax
Estate & Gift Duties

4. Meet Carol
• Recently widowed but in good health now living
in Auckland after 18 years in the UK
• Carol’s late husband Don was an American
citizen but she is not. The couple lived variously
in America, Australia and the UK, accumulating
properties in each country
• Carol has two children and five grandchildren
• Carol now wants advice on implications of
consolidating assets perhaps within a trust

5. Australia
About 600,000 New Zealanders live permanently
in Australia. Thousands more own investment
properties and holiday homes in Australia. Carol is
one such investor.
Many of those who moved to Australia after 2001
qualify as “temporary residents”. As such NOT
taxable on non-Australian sourced investment
income and capital gains.
Lucy, one of Carol’s grandchildren, has been living
and working in Sydney since 2016.

6. Australia – Temporary Residents
Temporary residents are not taxable on their non-
Australian sourced investment income
This would cover New Zealand interest income,
dividends from non-Australian shares, rental
income.
For example, Lucy could have a term deposit in
New Zealand and ask for 2% Approved Issuer Levy
to be deducted from the interest instead of 10%
non-resident withholding tax

7. Australia – Capital Gains
Australia taxes capital gains as income. 50%
discount on gain given for assets held more than
12 months.
BUT discount NOT available to either non-
residents OR temporary residents.
Real property defined as “taxable Australian
property”. Therefore, non-residents ARE taxed on
gains arising from such assets.
12.5% withholding tax applicable to real property
disposals over A$750,000

8. Australia – Capital Gains example (1)
Carol acquired an Queensland investment
property in July 2008 for A$250,000. She wants to
sell and its current market value is A$350,000.
A$
Taxable gain 100,000
Tax due
First A$87,000 @32.5% 28,275
Next A$13,000 @37% 4,810
Total tax payable A$33,085

9. Australia – Capital Gains example (2)
By contrast the tax payable by an Australian in
same situation and no other income:
A$
Taxable gain 50,000
Tax due
First A$18,200 @NIL 0
Next A$18,800 @19% 3,572
Remaining $A13,000 @ 37% 4,810
Total tax payable A$8,382
Difference A$24,703

10. Australia – Capital Gains example (3)
Carol’s Australian tax resident uncle Jim dies
leaving her a portfolio of New Zealand shares with
a market value at death of A$200,000. The shares
have a cost base of A$100,000.
As Carol is not an Australian tax resident AND the
New Zealand shares are not ‘taxable Australian
property’, therefore a capital gain of A$100,000
would arise for Jim’s estate on the transfer to her.

11. People’s Republic of China
Carol’s grandson Arawa has a Chinese partner, Li,
who is selling her Shanghai apartment to help her
and Arawa purchase a joint home in Tauranga.
Issues for Li to watch out for:
• Citizens of PRC may still be regarded as domiciled
in PRC even if residing outside China
• Capital gains from sale of property taxed at 20%
• Land appreciation tax, Stamp Duty and
provincial/city taxes also applicable
• Potentially might see PRC make greater use of AEOI
and information sharing

12. United States of America
• As a US Citizen Carol’s late husband Don was
required to file Federal income tax returns and
related disclosures such as the “FBAR” (Foreign
Bank Account Return) even if he was not tax
resident in the US
• Estate Tax imposed on every citizen or resident of
US. Estate Tax NOT covered by US-NZ tax treaty
• Estate Tax return required if value of Don’s US
situated assets exceeded US$60,000

13. United States of America
After Don’s death Carol now is the sole owner of a
holiday home in Florida. She has no desire to visit it
so wishes to dispose of the property.
• As it is real property situated in US then Gift Tax of
up to 40% could apply if Carol gives it to one of her
children or grandchildren.
• Alternatively as a non-resident alien then a sale of
the property is taxable with a 15% withholding tax
applying.

14. United States of America
On 21st May the Internal Revenue Service
announced a number of international compliance
campaigns. Five of these are applicable to
individuals and trusts:
• Non-compliance & campus assessed penalties;
• Forms 1042/1042S Compliance;
• Non-resident alien treaty exemptions;
• Non-resident alien Schedule and other deductions;
• Non-resident alien tax credits.

15. United Kingdom
Carol (and Don) resided in the UK from June 1999
until July 2017 when Carol returned to New Zealand
after Don’s death. Assets in the UK consist of:
• Former family home in London worth £750,000
• An investment property valued at £350,000
• Stock portfolio valued at £500,000
• In addition she has assets outside the UK valued at
£3 million
What’s Carol’s biggest tax risk?
Inheritance Tax

16. Inheritance Tax
Inheritance Tax (IHT) is a unified gift and estate tax which
applies on a worldwide basis on the estate of anyone who
was domiciled in the UK at the time of death. It also
applies to all UK situated assets regardless of the owner’s
domicile. Carol’s potential IHT liability is as follows:
Total value of Carol’s worldwide estate £4,600,000
Less 2 x nil rate bands £325,000 x 2 650,000
Less principal private residence exemption 100,000
Chargeable estate £3,850,000
IHT payable at 40% £1,540,000

17. Inheritance Tax
Inter-vivos gifts (“Potentially Exempt Transfers”) will
be excluded from her estate if Carol survives seven
years from date of gift.
Otherwise gifts included in estate but sliding scale
applies if Carol survives three or more years after gift
beginning with 20% reduction in tax charge rising to
80% if gift between six and seven years.
Gifts to trust are immediately chargeable (but could
use nil-rate band).

18. Inheritance Tax – The long reach

19. Inheritance Tax – Deemed Domicile
5 April
2020 (2)
End deemed
domicile
Arrives
in UK
1 July
2017
5 April
2021 (3)
5 April
2022 (4)
Carol is deemed to be domiciled in the UK because she was
tax resident in the UK for 15 of last 20 UK tax years
June
1999
Returns to
NZ
5 April
2018
5 April
2019 (1)
Carol will be non-UK domiciled from 6 April 2022 when four
complete UK tax years will have passed since she became
non-resident

20. Inheritance Tax – the retrospective reach
From 6 April 2017 a formerly UK-domiciled person who is UK
tax resident in a UK tax year will be deemed to be UK
domiciled if her or she was ALSO UK tax resident in ONE of the
two proceeding income years
For example, Alan was born in the UK in 1965 but migrated
permanently to New Zealand in 1970. In May 2017 he moved
to the UK to join his new partner. He is deemed UK tax
resident for the UK 2017-18 tax year.
If Alan is deemed UK tax resident for the UK 2018-19 tax year
he will be deemed to have a UK domicile from 6th April 2018.
His worldwide assets are therefore subject to IHT from that
date.

21. United Kingdom - Capital Gains issues
Carol decides to sell all her UK real property.
Implications of doing so are as follows:
• If the sale of her former family home is
completed within 18 months of moving out no
capital gains tax charge will arise.
• If not, the gain since she moved out will be
taxed, potentially at the maximum rate of 28%.
• Any gain on the investment property since 6th
April 2015 will be taxed, potentially at a
maximum rate of 28%

22. United Kingdom – Remittance Basis
A special remittance basis is available for persons
who are tax resident but not domiciled in the UK
“Non-doms”. These persons were only taxable on
income and gains remitted to UK. Carol as a Kiwi,
and Don as an American qualified for the
exemption.
Remittance basis rules have been subject to
regular change over past 10 years beginning with
introduction of a remittance basis charge with
effect from 6 April 2008.

23. United Kingdom
Remittance Basis Example 1
For the year ended 5th April 2017 Carol had
unremitted overseas income of £100,000 and
capital gains of £400,000. Ordinarily she would
pay £40,000 of income tax and £80,000 in capital
gains tax on this income and gains.
Instead Carol pays a remittance basis charge of
£60,000 and she will not be taxed on the
unremitted income and gains.

24. United Kingdom
Remittance Basis Example 2
Carol’s grandson Rangi is in the first year of his OE
in the UK. Rangi has net New Zealand interest
income for the year ended 5th April 2019 of under
£2,000 which is left in New Zealand.
As Rangi is a non-dom and the income is not
remitted to the UK he can exclude it from his UK
tax return for the year. He is still entitled to his
UK tax-free personal allowance of £11,850

25. United Kingdom
Remittance Basis Example 3
Another granddaughter, Lizzie, is in the sixth year
of her OE in the UK. She has net New Zealand
rental income for the year ended 5th April 2019 of
£15,000, which not remitted to her from New
Zealand.
• Lizzie can exclude the rental income from her
UK tax return for the year.
• If she does this, she will then NOT be entitled to
the UK tax-free personal allowance of £11,850.

26. United Kingdom
Inheritance Tax booby trap
United Kingdom
Interest free loan in GBP
Family
Trust
New Zealand
Lizzie
(Beneficiary)
• IHT applies to all UK situated assets
• The residential property caught
• UK situated assets of the trust also
includes the interest free loan
Carol wants to help Lizzie purchase a house in London so her NZ
lawyer suggests a trust lends £500,000 to Lizzie

27. Beneficiaries in the UK – Disclosures (1)
Reg 45(14) The Money Laundering, Terrorist Financing and
Transfer of Funds (Information on the Payer) Regulations 2017
in force 26th June 2017
The NZ trust will have reporting obligations to HMRC in every
year in which trustee LIABLE to pay ANY of the following taxes
in the UK:
• Income tax;
• Capital gains tax;
• Inheritance tax;
• Stamp duty reserve tax; and
• Stamp duty land tax.

28. Beneficiaries in the UK – Disclosures (2)
If a New Zealand trust has a reporting obligation then it must
provide following information:
• Name, date of establishment, country of residence and
country of administration of trust, and details of the
trustee;
• Name, tax number, address, passport number, and date of
birth of settlor, all current beneficiaries, and “all controlling
persons” (including protectors and any other person with
the ability to influence the trustee’s decisions);

29. Beneficiaries in the UK – Disclosures (3)
Reporting obligations continued:
• Description of the class of “potential” beneficiaries,
INCLUDING any wishes as to future beneficiaries by the
settlor in a Memorandum of Guidance or other document;
• Details of the trust’s worldwide assets including current
market value; and
• Details of the trust’s legal, financial and tax advisors.
• If not already registered with HMRC must report by 31
January following end of tax year

30. United Kingdom - Conclusions
• The UK presents a number of sometimes
interconnected tax issues and opportunities
• Inheritance Tax can have a long and potentially
costly reach even for Kiwis
• Disposals of real property by non-residents now
trigger capital gains tax issues
• Still some tax planning opportunities to make use
of the remittance basis
• Use of trusts problematic

31. Foreign Superannuation Schemes
Many migrants have foreign superannuation
schemes. Since 1 April 2014 transfers and
withdrawals dealt with under section CF 3 Income Tax
Act 2007. Number of pitfalls but briefly:
• Transfers after first four years of residence taxable;
• Covers all British pension schemes, United States
Individual Retirement Accounts and 401(K) Plans;
• Transfers of Australian superannuation schemes
into KiwiSaver schemes are NOT taxable.

32. Conclusion
• Cross-border issues with clients common but
complicated and increasing likelihood of
disclosure
• Some planning opportunities exist but have
pitfalls
• UK Inheritance Tax is highly complex and
constantly evolving, so clients with assets in
the UK or newly arrived from the UK present
particular risk

33. “And remember, let’s be careful out there”

34. Questions