The Australia Taxation Office has New Zealand trusts in its sights as part of its huge Project Wickenby tax avoidance probe.
ATO commissioner Michael D'Ascenzo last week warned Australian taxpayers against avoidance schemes that use New Zealand administered trusts as a way to gain tax-free income.
The warning is another blow to New Zealand's financial standing, coming as news broke that the country had, along with Russia, been turfed off a European Union anti-moneylaundering "white list" because of weak regulation.
Australians who use New Zealand foreign trusts while earning their income from Australia were last week cautioned that the schemes are being investigated and are part of the ATO's Project Wickenby sweep.
D'Ascenzo said the schemes have been marketed as a way to accumulate Australian sourced income and capital tax-free under taxation agreements between the two countries.
"However, we think this is incorrect and misleading," D'Ascenzo said.
In March, the ATO scored a major breakthrough in its Project Wickenby probe when a Federal Court ruled it could gain access to data on 1300 customer accounts in Vanuatu. ANZ's submission that production of the data would be oppressive, breach bank confidentiality and violate secrecy provisions in Vanuatu law were rejected.
Project Wickenby was set up in 2006 after Australian police seized the laptop of a Channel Islands accountant, Philip Egglishaw, and subsequently received leaked information on 20 Australians holding $110 million in Liechtenstein banks from former bank computer technician and mystery man Heinrich Kieber.
This month international tensions over the investigation reached new heights after the Vanuatu government expelled 12 Australian federal police agents in retaliation for the arrest of one of Prime Minister Sato Kilman's secretaries at Sydney airport in April. The secretary, Clarence Marae, was detained on charges of conspiring to defraud the Commonwealth, and media reports suggested the arrest was connected with Wickenby.
Marae made his first appearance in the Brisbane Magistrate's Court last week.
The Wickenby probe has so far resulted in at least 26 convictions with most offenders receiving jail sentences.
Internet searches revealed a number of companies offering New Zealand foreign trusts and touting their tax benefits.
One describes the New Zealand foreign trust as a "unique legal arrangement" which can legally and recognisably provide genuine zero taxation for international business and "ultimate asset and wealth protection".
A note on the website of law firm Fortune Manning says in most jurisdictions the tax treatment of a trust is determined by the residency of the trustees. However, the tax treatment of a trust under New Zealand tax law is determined by the residency of the settlors.
As a result, more and more foreign tax residents are considering establishing foreign trusts here, it says.
"A foreign trust that has New Zealand tax resident trustees but no New Zealand tax resident settlors only pays tax on its New Zealand sourced income and does not pay tax on any income derived from outside New Zealand," the website said.
According to the ATO, the schemes being investigated involve establishing a foreign trust to provide administration to an Australian business for a fee which usually includes a mark up of 20 per cent to 30 per cent above cost. The fee, excluding the mark up, is paid to the trust to cover the administration costs.
The mark up, however, may be paid indirectly by the business to the owner of the business. The income, including the mark up, is not reported in either Australia or New Zealand for tax purposes.
Variations to this include the trust providing the services of an Australian individual for a fee. The individual appears to have access to the fees paid to the trust and again the income is not reported in Australia or New Zealand.
"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.
"Despite claims by people promoting the scheme, Australian and New Zealand tax laws clearly spell out the tax liabilities of individuals and businesses."
D'Ascenzo said the ATO has informed New Zealand's Inland Revenue Department of the marketing of the schemes.
- Sunday Star Times