Trustees Beware of FATCA

6 October 2015

Are any of the trustees, settlors or beneficiaries of your trust a citizen or resident of the United States (US)? If the answer to this question is yes then beware of the requirements of the Foreign Account Tax Compliance Act (FATCA). FATCA was put in place by the US Internal Revenue Service (IRS) to identify and prevent tax evasion by US persons and battle offsure tax non-compliance. The US is one of the few countries who tax based on citizenship rather than residency. The US requires citizens to complete tax returns in respect of their worldwide income. This regime provided ample chances for tax evasion by US citizens.

To reduce this evasion, essentially, FATCA now requires Financial Institutions (of which a trust may be considered to be) to identify US persons and register and report particular information about these persons to the IRS. To enable the enforcement of FATCA requirements in New Zealand the Government has entered into an intergovernmental agreement with the US. New Zealand’s Inland Revenue Department will also engage directly with the IRS in respect to enforcement and the compliance of FATCA requirements.

The onus is on Trustees to classify the trust to determine what the Trust’s status is under FATCA and any resulting compliance requirements. Every trust in New Zealand requires FATCA classification. The process of classification includes:

1. Identifying whether the trustees, settlors or beneficiaries are US persons; and
2. Identifying what types of investments are held.

Once the Trustees have considered the two elements noted above they then must correctly classify their FATCA status and carry out the appropriate due diligence, registration and reporting requirements. By and large, a New Zealand Trust will either be considered a Financial Institution or Non-Financial Foreign Entity. The consequence for New Zealand trusts is that they often hold investments and as such could be considered a Financial Institution. When an entity is considered a Financial Institution the FATCA compliance requirements are triggered. Noncompliance with FATCA could result in penalties being incurred by trustees and the IRD will attend to enforcement.

However, each trust requires an individual assessment and in some instances the trustees will not be required to carry out any further action other than self-assessing their FATCA classification and status. If the trust does not contain any trustees, settlors or beneficiaries who are US persons then it is unlikely that there will be any due diligence, reporting or registration requirements to the IRS.


Glenda Graham is an Associate in the Trusts & Estates team at Norris Ward McKinnon. Email Glenda at [email protected]

Read more about Norris Ward McKinnon