We have been flooded in the last week or two with articles, letters and commentaries on foreign trusts after the release of the so-called Panama Papers.

The idea that the Prime Minister is benefiting from a foreign trust is unlikely given that foreign trusts only really benefit non-New Zealand residents. We have a fairly transparent tax system here which will capture basically all overseas income in some way or other.

Things are very different in the UK where Prime Minister David Cameron has been under fire. In the UK tax avoidance is not illegal and taxpayers can legitimately use offshore trusts to obtain tax benefits. However, the benefits have been eroded in recent years as anti-avoidance provisions have increasingly been introduced to close loopholes which previously existed. Even if Cameron and his family have done nothing illegal, it’s not a good look when they are trying to avoid UK tax.

Let’s be clear at the outset what the issue in New Zealand is.

This is not about New Zealanders evading tax. That’s why I’m reasonably confident that Key has nothing personally to hide.

It’s about foreigners using our tax system to evade tax in their country of residence due to the lack of financial disclosure. Some of those foreigners might also be money-launderers or possibly terrorists and there are New Zealanders and New Zealand based companies aiding and abetting these people.

The root of the problem is the way we tax trusts – which is out of line with the rest of the world. That begs the question – are we pioneers or fools? It looks at the moment as if we might be the latter.

The concept of a trust has evolved from the UK system of law and so is largely limited to Commonwealth countries and the likes of Jersey, Guernsey etc.

Most, if not all, of these countries tax the income of the trust according to where it is managed and controlled – in other words, where the trustees are resident. For some reason New Zealand decided in 1988 to adopt a different approach and tax the trust according to the residence of the settlor (the person or persons who establish the trust).

Since then the offshore trust industry has been established but that was not the intention at the time. Maybe time has come to fall in line with the rest of the world.

The issue of overseas pension transfers has been bubbling for some time now. Many migrant taxpayers will be subject to Inland Revenue audits in the coming months as auditors look to collect tax from pension transfers that occurred years ago. Those taxpayers had until March 31, 2016 to include the transfers in a tax return despite there being no expectation of a tax liability when they transferred the pensions. However, the possibility of tax arising on a pension transfer was suggested by Inland Revenue as far back as 1991 but the Government and Inland Revenue took no action until 2009. They then woke up to the idea that tax revenue was being lost and this led to some new legislation which some regard as retrospective legislation. Technically it’s not retrospective because the legislation was there in the first place but it was unclear and was never implemented. It is equivalent to issuing speeding tickets from a speeding camera five years or more after the offence took place. The Government will no doubt argue that it is acting within its powers but, in my opinion, it is an abuse of power.

Secondly, the tax laws relating to overseas mortgages are, in my opinion, the most inequitable piece of tax legislation I have ever come across. These rules apply to any New Zealand resident who owns an overseas rental property with a mortgage. If a person owns, say, a mortgaged UK rental property the rules then create a tax liability on the mortgage when the UK pound falls in value compared to the New Zealand dollar. Imagine having to pay tax on an asset which has fallen in value! It makes no logical sense whatsoever. I tried campaigning for change some years ago but gave up as nobody in the Beehive seemed interested. Why are we taxing an overseas mortgage when we should be taxing the asset? Again, are we pioneers or fools?

Finally, there is the issue of a comprehensive capital gains tax. We already tax certain capital gains by way of complex legislation on overseas shares but nobody seems prepared to take the next step – maybe because it would upset rental property owners and that would mean losing voters. Let me tell you that in the UK they have been targeting landlords for years with increases in tax on residential property. And they’ve remained in power!

There are many good features of our tax system but also some serious deficiencies and the foreign trust regime is just one of several which need addressing. Eleanor Catton has said that we are dominated by politicians who are ‘neo-liberal’, ‘profit-obsessed’ and ‘money hungry’ when it comes to culture. It seems to me that some of these criticisms could also be made when it comes to tax policy.

Martin Riley’s director sterling tax services Ltd based in Christchurch and advises on UK and New Zealand tax.  He can be contacted by email at martin@sterlingtax.co.nz.