Imagine having money or assets and not having to pay tax on them! Sounds like a dream right? But for the super wealthy, it can be very real. Rebecca Stevenson takes a dive into the muddy waters of offshore trusts.
How is it that a Russian bank which collapsed owing billions was registered to a villa in Parnell? And that five New Zealand trusts recently found to be shams are at the centre of a power-play against a Russian oligarch previously known as “cashier to the Kremlin”?
For the super-rich, offshore trusts have been a favoured way of structuring their affairs to minimise exposure to tax and protect their wealth. Jersey, the Cayman Islands, Bermuda, the British Virgin Islands, the Cook Islands and even New Zealand are considered by the wealthy as good places to park assets.
The Panama Papers scandal first linked New Zealand’s trusts industry to a global network of the uber rich. As a consequence, the Government of the day added new rules requiring greater disclosure of the details of foreign trusts. Unsurprisingly, after this move the number of them here plummeted; secrecy is another key component of why trusts are popular.
And now we have the Paradise Papers, which show corporations like Apple and Nike and famous faces like Bono and Lewis Hamilton have taken advantage of offshore trusts to reduce their tax burden. Even the Queen is at it! God save us all.
Behind both the Panama and Paradise Papers is the International Consortium of Investigative Journalists, who have been leaked millions of files from offshore financial service providers and companies registers detailing how powerful people shift assets around to avoid scrutiny of their affairs. The Australian Financial Review is reporting (behind a paywall) that former PM John Key’s lawyer Ken Whitney is named in the latest dump, but give it time and more links may emerge.
But why would anyone do this? Let’s imagine you have a LOT of assets. You can set up a trust which essentially transfers ownership of the assets away from you to someone else (a trustee), who becomes the owner of the assets. The assets are held for the benefit of people named by the settlor (beneficiaries). Making it more complex, settlors can be trustees and can even be beneficiaries too, allowing them to retain some control over the assets.
Wouldn’t you just want to keep it all to yourself? Not necessarily, if it means you can save on tax. Putting it simply, foreigners can place assets (houses, cash, investments, for example) inside New Zealand-based trusts, and we don’t tax these assets or income if the settlor of the trust doesn’t live here. Because the assets are now not held by the settlor, they won’t need to pay tax on them in the country that they live in. Pretty sweet.
It’s not a total free-for-all, there are rules to offshore trusts. Foreign trusts cannot earn income in New Zealand, and it’s also not legal to set them up to hide assets from people you owe money to, and the reason for setting up a trust has to be genuine – but this is often where trusts are exposed.
For instance, our aforementioned “cashier to the Kremlin”, who was also the fellow who had an enormous Russian bank registered to a villa in Parnell, recently had a ruling against his Kiwi trusts being legitimate. A court in the UK found Sergei Pugachev’s trusts were set up with the intention “to retain control of the assets but use them as a pretence to mislead third parties by hiding his control”. Whoopsie.
And there you have it. Much like how tax minimisation is only tax avoidance once you’ve been busted, the use of offshore trusts is legal until someone or an agency takes legal action against the trust and proves it’s not legit.
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