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.