Trusts are a popular way of protecting property and managing assets in New Zealand. While there is no conclusive way of measuring the exact number of trusts in New Zealand, estimates put the figure somewhere between 300,000 and 500,000.
One of the main driving forces behind the popularity of trust use in New Zealand is likely to be the ease of trust administration and asset management and protection benefits, particularly when compared with other jurisdictions.
The rules governing New Zealand trusts have been stable for many years, predominantly governed by the Trustee Act 1956, however this is set to change. The legal framework for trusts has recently been subject to an in-depth review by the Law Commission and a draft bill is currently undergoing a consultation process, after which it is expected to be introduced to Parliament in 2017.
The existing Trustee Act has been criticised for being outdated and unclear with regard to the precise duties of trustees, giving scope for the mismanagement of trusts and with no easy legal redress for beneficiaries. There has therefore been pressure for modernised legislation that clearly outlines key trust principles so that they can be easily understood and applied.
The draft bill seeks to clarify the core concepts encompassing trusts, which will result in a more useful piece of legislation that can be applied to fix practical problems and reduce the costs associated with trust administration. This will effectively impose ‘minimum standards’ for the governance of trusts so that trustees and beneficiaries are clear on their precise obligations and duties.
The draft Bill features seven key proposed reforms. They vary in nature from clarifying the key features of a trust, to detailing the duties and powers of trustees, and preserving the Court’s position and powers.
In terms of clarifying trustees’ duties, the draft bill places five mandatory obligations on trustees, being the requirement to:
• know the terms of the trust,
• act in accordance with the terms of that trust,
• act honestly and in good faith,
• hold or deal with the trust property for the benefit of either the beneficiaries or the permitted purpose, and
• exercise the powers of a trustee for proper purpose.
In addition to the mandatory duties there are a further eleven default duties which can be modified and excluded by the terms of individual trusts, which cover areas such as; a general duty of care, duties relating to investing prudently, avoiding conflicts of interest, keeping proper accounts, acting unanimously, and for no reward.
The legalisation of these duties will provide protection to beneficiaries that assets held within trusts will be dealt with in their best interests, and give them legal remedies if trustees fail to meet these standards.
Beneficiaries will have the power to apply to the court to have a trustee decision reviewed if there are reasonable grounds that a trustee acted unlawfully. Courts will also be granted a new power to remove trustees who are convicted of a dishonesty offence.
As well as provisions which seek to make trusts more straightforward to understand, the draft bill includes additional provisions which are lacking from the existing act, covering the wind up of trusts, along with more options for the removal and appointment of trustees. These changes have been designed to simplify the wind-up process and provide greater flexibility and accountability to beneficiaries. Furthermore, when a company is acting as a trustee of a trust, it will now be required to clearly describe its trustee status in all communications eg. “X Ltd acting as trustee for Y trust”, in a move to improve transparency.
With these new provisions in mind, it is notable that there are no direct changes proposed to the tax treatment of trusts. However there is much more focus on trusts from a tax perspective following the recent “Panama Papers” scandal and the alleged misuse of NZ foreign trusts, and this has resulted in a Government led investigation into whether existing disclosure rules are adequate.
The Government is beefing up the requirements for foreign trusts in three key areas; registration, disclosure, and annual filing. The proposed changes will require all foreign trusts to formally register with the IRD and be subject to an increased number of disclosure requirements. Further changes introduce sanctions for non-compliance with the new rules, resulting in foreign trusts losing their exemption from New Zealand tax.
Combined with the updated Trusts Bill, trusts are therefore very much under scrutiny at the moment. Despite that scrutiny, it would appear that these changes may not have much practical effect for those who use trusts for their intended purpose.
As trustees will have more clearly defined duties and obligations, it will be important for all trustees to understand the new law, and their individual trust deeds, to ensure they discharge their duties with the appropriate standard of skill and care. However it is hoped that the majority of trustees are already acting with the due care and attention that the new rules seek to impose as a minimum standard.
Arguably, the simplification of the guiding legislation may lead to a further increase in the popularity of trusts. If this is the case, it remains to be seen whether this could ultimately lead to ongoing scrutiny and ultimately a further review of the tax treatment of trusts. But for now, their key benefits will continue to stand.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.