3. Trusts
A. Introduction
Trusts have been a feature of the New Zealand legal landscape
for many years.
The Trustee Act 1956 is similar to the Trustee Act
1925 (UK), and to the extent that the provisions in the Act
are augmented by common-law rules, UK and Commonwealth trust law
cases are of direct relevance to the interpretation of New Zealand
law.
B. Most Frequently Used Trusts
The most common type of inter vivos trust is the
discretionary trust. Occasionally, fixed trusts are used. Unit
trusts are commonly used as vehicles for collective investment
schemes; their use tends to be limited to this function, as unit
trusts are treated for tax purposes as companies, unless they fall
under the new Portfolio Investment Entity (PIE) regime canvassed in
Para 5(a)(ii) of this paper. Charitable purpose trusts are
common, although less numerous than discretionary trusts
established for family purposes.
Even though New Zealand does not have estate duty or capital
gains tax, discretionary trusts have continued to grow in
popularity, and are used by a wide cross-section of the community,
from the very well-off to those of more modest means, because of
perceived asset protection benefits, succession planning and
flexibility.
Trading trusts are a developing vehicle in New Zealand, as their
flexibility, both tax-wise and otherwise, makes them attractive for
small to medium-sized businesses. Trading trusts are also tax
effective for cross-border activity, as they overcome some of the
difficulties with corporate vehicles that do not allow foreign tax
credits to be passed through to individual shareholders.
Testamentary trusts tend to be relatively simple for most
individuals in New Zealand, even for wealthier individuals, as it
is common practice for an individual's residuary estate to be left
by will to a discretionary trust established by that
individual.
Prior to the abolition of estate duty in the early 1990s, it was
quite common for wealthier individuals to use life interest wills,
which conveyed a life estate in respect of the family home and
investment assets to a surviving spouse, with the residuary estate
passing to final beneficiaries (usually children). These are less
common today.
Non-charitable purpose trusts are not permitted under New
Zealand law.
C. Governing Law
New Zealand has not yet enacted domestic legislation to give
recognition to the Hague Convention on the Law Applicable to
Trusts and on their Recognition, 1 July 1985.
D. Creation Of A Trust
I. Valid Constitution
Trusts must exhibit the 'three certainties'. Trusts are created
by deed, and the formalities of a deed under New Zealand law are
that the deed must be executed by all parties purporting to be
bound by the deed, and those signatures must be properly witnessed.
No particular form of words is required and sealing or delivery of
deeds is not required. A company may execute a deed under the
signature of two of its directors without a common seal or
witnessing. Nonetheless, where the constitution of the company
permits execution of a deed by a single director, that signature
must be properly witnessed by another person.
Subsequent transfers of property to a trust must follow those
formalities necessary for the conveyance of that particular class
of property.
Ii. Duration And Termination
With regard to the maximum duration of a trust, the common-law
rules regarding perpetuities are incorporated into the
Perpetuities Act 1964. Where the instrument so provides,
the perpetuity period applicable to disposition under the rule
against perpetuities shall be such period not exceeding 80 years
from the date of the instrument or such other period as is
specified in the instrument.
The Perpetuities Act 1964 sets out that the rule
against accumulations may apply to directions to accumulate but not
to powers to accumulate if the latter are specifically given to
trustees.
The common-law perpetuity period of a 'life in being and 21
years' is enshrined in the Perpetuities Act 1964, with
some enhancements.
Iii. Trustees
Usually, power to appoint trustees is vested in the settlor of
the trust, although any competent person can hold this power.
Trustees have a statutory right of indemnity under the
Trustee Act 1956. Trust deeds often contain a detailed
right of indemnity, and this right of indemnity might be lost only
in the event of dishonesty or wilful breach of trust by a trustee.
In other circumstances, a threshold of gross negligence causes the
trustee's right of indemnity to be lost.
Iv. Protectors
The office of protector is valid under New Zealand law.
Protector-style trust deeds have not been common in the past, but
international influences have resulted in the incorporation of the
protector role in some New Zealand domestic trusts. This role is
often limited to a power to appoint and remove trustees, and/or a
power to appoint and remove beneficiaries. Traditionally, these
powers have been vested in the settlor. It is also quite common for
the power to appoint and remove beneficiaries to be vested in the
trustees rather than in the settlor. There are no tax or other
reasons that necessitate the appointment of a protector independent
from the settlor to exercise such powers.
V. Role Of Public Trustee
The role of Public Trustee in New Zealand is articulated in the
Public Trust Act 2001. The public trust has equivalent
standing to the statutory trustee companies provided for under the
Trustee Companies Act 1967. It is a Crown-owned commercial
body corporate, which in a practical sense competes with the other
statutory trustee companies.
In relation to intestate estates, there is broad discretion as
to the appointment of appropriate individuals or other parties to
act as administrators of an intestate estate, and this function
does not devolve automatically to the public trust or any other
statutory trustee companies.
It is permissible for trustees and protectors to be remunerated,
as long as there is an express charging provision in the trust
deed. Otherwise, such remuneration is not permissible. Most New
Zealand domestic inter vivos trusts have individuals as
trustees (often including the trusts' settlors), and trustees other
than professional advisers are not usually remunerated. The use of
trustee corporations to act as trustees is less common than may be
the case in other jurisdictions.
E. Trust Administration
I. General Management
The duties and responsibilities of trustees under the
Trustee Act 1956 were substantially modified by the
Trustee Amendment Act 1988. The 'prudent person rule' of
American jurisprudence has been adopted and is now the guiding
principle regulating the power of trustees to invest. A trustee
exercising any power of investment is mandated to exercise the
care, diligence, and skill that a prudent person of business would
exercise in managing the affairs of others. The threshold of this
duty is greater where a trustee's profession or business involves
acting as a trustee or investing money on behalf of others. These
duties imposed on a trustee apply only where no contrary intention
is expressed in the trust deed.
While the non-delegation principle is part of New Zealand law,
this principle may be overridden by express provision in the trust
deed. Commonly, trustees will delegate certain functions, such as
investment management, but will retain the primary trustee
administration responsibility in their own hands.
Ii. Variation Of A Trust
If a trust does not have an express power of variation contained
in the deed, the trust deed may not be amended or modified without
making a successful application to the High Court to vary the deed.
Where there is no express power of variation, variation is often
achieved by way of trust re-settlement. Such re-settlement can
raise undesirable tax issues for domestic trusts, and any such
re-settled trust must adhere to the perpetuity period applicable to
the original trust.
F. Confidentiality And Disclosure
UK common-law rules concerning the provision of information to
beneficiaries also apply in New Zealand. The case of Rosewood
Trust Ltd v Schmidt [2003] UKPC 26 has been followed
in New Zealand.
To the extent that the trust may be liable for income tax in New
Zealand, disclosure of income and computation of a tax liability
must be made to the Inland Revenue Department (IRD). Similarly, if
a trust carries on a 'taxable activity' requiring it to register
for goods and services tax (GST), equivalent to a value added tax
(VAT), then tax compliance requirements concerning the supply of
goods or services of the trust as part of a business or
quasi-business activity must be undertaken.
G. Foreign Trust Disclosure And Record-keeping
Requirements
The government recently enacted legislation relating to New
Zealand foreign trusts (i.e. New Zealand trusts settled exclusively
by non-New Zealand resident persons). The new rules (which are
contained in the Tax Administration Act 1994 and the
Income Tax Act 2007) came into effect 1 October 2006 and
require that financial and other records pertaining to foreign
trusts are maintained in New Zealand, so that upon any valid
exchange of information request under a double tax treaty or
information exchange agreement, the New Zealand Inland Revenue
Department (IRD) has the capacity to obtain information from the
New Zealand trustee.
A New Zealand resident trustee may be a 'qualifying resident
foreign trustee'. There is no strict requirement to have a
qualifying resident foreign trustee, but there is an advantage in
doing so, as described below. A qualifying resident foreign trustee
is defined as a person who is a resident foreign trustee and
who:
- if a natural person, is a member of an approved organisation
(approved by the IRD), or
- if not a natural person, has a director or other natural person
in a position allowing significant influence over the management or
administration of the trustee, who is a resident of New Zealand and
a member of an approved organisation.
Individuals holding practising certificates as barristers and
solicitors qualify, together with chartered accountants who hold
current practising certificates with the New Zealand Institute of
Chartered Accountants. In addition, full members of STEP meet the
criteria, as STEP has been accepted as an approved
organisation.
On accepting appointment as a trustee of a New Zealand foreign
trust, the New Zealand resident trustee must advise the IRD within
30 days of the following particulars:
- name or other identifying particulars for the trust
- name and contact particulars of the New Zealand-resident
foreign trustee
- whether a settlor is resident in the Commonwealth of Australia,
and
- name of the approved organisation of which the trustee or
director/manager is a member (if applicable).
Changes to these particulars must be disclosed to the IRD within
30 days.
If there is more than one New Zealand resident trustee, then
only one trustee has to disclose the information to the IRD as
agent for the other trustees. Nonetheless, all trustees will be
liable for any breach of the disclosure obligations. The IRD has to
be advised of the agency appointment. One trustee may also be
appointed as agent to hold the records described below.
There is a two-year 'holiday' for a natural person trustee who
is not resident in New Zealand but who subsequently acquires New
Zealand tax residency. Within that two-year period, the natural
person trustee need not comply with these initial disclosure
requirements unless that person is in the business of providing
trustee services or is a person who was previously resident in New
Zealand within five years of reacquiring residency.
The trustee must also maintain certain records in New Zealand in
respect of the trust. There is ability to claim dispensation from
this requirement by applying to the IRD, if the requisite records
are retained by an overseas party and if there is some undertaking
or arrangement to make those records available if ever requested by
the IRD. The records must be retained for seven years after the end
of the relevant income year.
Non-compliance with these new rules results in penalties. In
addition, if there is no qualifying resident foreign trustee and
records required to be kept under the legislation are not produced
to the IRD, then a liability can arise for tax on worldwide income.
Where a trustee subsequently provides the outstanding records, then
the liability for tax on worldwide income will cease
retrospectively.
If a qualifying resident foreign trustee does not disclose
information or keep or provide records, the trustee (or officer)
will be subject to a monetary fine, imprisonment or both. The trust
will not, however, become subject to tax in New Zealand on its
worldwide income.
The ability to seek information from a New Zealand trustee will
have to be based upon a valid exchange of information request under
an applicable tax treaty or exchange of information agreement. The
IRD has unequivocally stated that information requests must be
taxpayer specific: they will not permit 'fishing expeditions' by
foreign Revenue Authorities.
The perceived mischief these rules are aimed at is abuse of the
foreign trust regime by Australian taxpayers. For practical
purposes, there is little expectation of active information
exchange in respect of individuals resident in other
jurisdictions.