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New Trust Law

New Trust Law!

 

There is a new trust law for New Zealand which was enacted late July 2019.  This is the Trusts Act 2019 which takes effect from January 2021. This leaves a short 18 month window before the changes apply.

 

New rules for managing information.

 

The legislation is designed to make trust law more accessible and easier to understand. This is to ensure beneficiaries can enforce the trusts in which they have an interest.  Trustees will have obligations to:

  • Hold core documents
  • Provide certain information to beneficiaries
  • Respond to beneficiary requests for information

 

The legislation makes trustee duties and responsibilities very transparent.  If beneficiaries are better informed, trustees will be more accountable.  Trustees will need to be on top of their game - particularly professional trustees who are held to a higher standard of care.

 

New skill sets required

 

Managing expectations will be an important part of the trustee's role going forward.  For example,  managing expectations between:

  • Co-trustees,
  •  Trustees and beneficiaries
  • Trustees and trust creators (settlors)
  • Trustees and their advisers

 

The Trust will no longer be a secret.  To discharge my duties as a professional trustee I have given some consideration to preparing an advisory letter (refer below to a draft template) to beneficiaries to front foot questions and queries that will cover a number of the new requirements but also that the Trusts purpose is to first look after the primary beneficiaries which is almost always the settlors.

 

As a senior member of the New Zealand Trustees Association (NZTA member 1006) I shall continue to take a lead to help you as a co-trustee to discharge your duties as Trustee in the appropriate manner. We shall discuss this further at our next annual trustee meeting.

 

 

Template letter Example:

 

 

XX  September 2019

 

 

 

Beneficiary

Address Line 1

Address Line 2

Town/City

 

 

 

Good morning

 

I write to you in my capacity as a trustee of the XXXX Trust which I will call "The Trust."

 

Your parents formed the trust in 19XX and arranged that they, their children and grandchildren would all be beneficiaries of it. The Trust is what is known as a "Discretionary Trust".  This means none of the beneficiaries have any right to any money or property from the Trust.  Each of the beneficiaries has only a right to be considered by the trustees for a distribution.

 

Discretionary trusts are common in New Zealand. They are generally established by parents for themselves and their family.  The parents will typically want to try to ensure they have enough funds to support themselves from the Trust for the rest of their lives.

 

Trusts are set up for a number of reasons including asset protection, creditor protection, avoidance of death duty, rest home subsidiaries and/or relationship property purposes.

 

Many parents have not wanted to inform the children of the fact that the Trust has been created and that the children are discretionary beneficiaries of it, from a fear their children, on learning these things, might become demotivated in the expectation that they will receive substantial sums of money from the Trust.  This is not intended to be the case with the XXXX Trust.  Your parents made it clear when the Trust was created that it was not to become a means for demotivating children. If the trustees believe making a distribution to a beneficiary may weaken a child's resolve to work hard and succeed on his/her her own merits, the trustees are unlikely to make distributions to that person.

 

If the trust has sufficient liquid assets to be able to make distributions, the trustees may be willing to consider making loans to children or assisting them with the payment of educational fees in the hope that such forms of financial assistance will assist the child to further his or her career based upon his/her own self-motivation.

 

Beneficiaries of the Trust are entitled to be given a copy of the Deed of Trust (most New Zealand Trusts are formed with such a document) together with the Trust's annual financial statements.  If you would like to see the Deed of Trust and the Trust's most recent financial statements can you, please let me know and I will provide you with copies of them.

 

You should feel free to contact me or any other trustee if you want more information about the Trust but in doing so you should be aware that in general, trustees do not have to disclose any details of the discussions and deliberations concerning any distributions they make or decide not to make.

 

If in the years ahead you would like to bring to the trustees attention any reasons why you consider they should make a distribution to you, you should feel free to do so, you should be aware the trustees are likely to be guided in their response by some fundamental principles, namely:

  • They do not intend to make distributions they consider may result in a beneficiary being demotivated in their studies and/or ambitions;
  • They may be sympathetic to requests for financial assistance where the provision of such assistance will assist the beneficiary to advance more quickly down a career path; and
  • They will want to ensure the Trust has a constructive and not a destructive, effect on family relationships and on a beneficiary's degree of motivation to succeed in life.

 

They will not want to make distributions if they may be intercepted by a spouse/partner or by a creditor.

 

The Trusts primary beneficiaries shall remain the Trustees primary concern at this point in time.

 

Why do We Need to Ask For Information

Why we need to ask for information

New Zealand has passed a law called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (we will call it the AML/CFT law). The purpose of the law reflects New Zealand's commitment to the international initiative to counter the impact that criminal activity has on people and economies within the global community.

Recent changes to the AML/CFT Act mean that from 1 October 2018, accountants are required to comply with its requirements. This law requires accountants to do a number of things to help combat money laundering and terrorist financing, and to help Police bring the criminals who do it to justice. The AML/CFT law does this because the services accountancy firms and other professionals offer may be attractive to those involved in criminal activity.

The law says that accountancy firms and other professionals must assess the risk they may face from the actions of money launderers and people who finance terrorism and to identify potentially suspicious activity. To make that assessment, accountants must obtain and verify information from prospective and existing clients about a range of things. This is part of what the AML/CFT law calls "customer due diligence" ('CDD').

CDD requires an accountancy firm to undertake certain background checks before providing services to clients or customers. Accountants must take reasonable steps to make sure the information they receive from clients is correct, and so they need to ask for documents that show this.

We will need to obtain and verify certain information from you to meet these legal requirements. This information includes:

  •   your full name; and
  •   your date of birth; and
  •   your address.

To confirm these details, documents such as your passport (preferred), driver's licence or your birth certificate, and documents that show your address, such as a current bank statement will be required.

If you are seeing us about company or trust business, we will need information about the company or trust including the people associated with it (such as directors and shareholders, trustees and beneficiaries). If we don't already have this information.

We may also need to ask you for further information. We will need to ask you about the nature and purpose of the proposed work you are asking us to do for you. Information confirming the source of funds for a transaction may also be necessary to meet the legal requirements.

If we are not able to obtain the required information from you, it is likely we will not be able to act for you. We will be precluded to do so by law.  Before we start working for you, we will let you know what information we need, and what documents you need to show us and let us photocopy.

Please contact us if you have any queries or concerns.

Hamish Pryde – Coombe Smith (PN) Limited – AML Compliance Officer

 

New Trust Law proposed

New Trust Law Proposed

There is a bill currently before Parliament which when enacted will be the first big change to New Zealand's trust law in more than 60 years.  There is estimated to be more than 500,000 Trusts operating in New Zealand. Nobody knows for sure as there is no central trust register like the company's register. Read more…

Loss Ring Fencing on Rental Properties

Loss Ring Fencing on Rental Properties

The government will introduce loss ring-fencing on residential rental properties, which is scheduled to become law effective from 1 April 2019. This means it will apply for the 2020 tax year.  The tax legislation proposed is complex and politically motivated.

 What Changes are proposed?

 For years, residential property investors have been able to use losses on rental properties to offset their personal tax. Residential rental properties are often "negatively" geared. This means that the expenditure exceeds the income, resulting in a loss. The government has proposed ring-fencing these losses and preventing investors from using any losses against their personal tax. Read more…

Mixed-Use Assets New Legislation

Mixed-Use Assets New Legislation

From the beginning of the 2013–14 tax year owners of "mixed-use" holiday homes will have to work out their income tax obligations differently.

You have a mixed-use holiday home if during the tax year; your property is used both for "private use" and "income-earning use".

What is "private use"?

Private use of your property means:

•   Use by you or your family, even if rent is paid.

•   Use by non-associated people if you earn rent at less than 80% of market rates.

What is "income-earning use"?

Income-earning use of your property means use by a non-associated person from which you earn rent at 80% or more of market rates.

Exemptions

If your income from income-earning use is less than $4,000 for the year, you can opt to keep the holiday home outside the tax system. That means your rental activity doesn't need to be included in your income tax return. You don't return any of your income and you can't claim any of your expenses for the holiday home.  You can also choose for your rental activity to remain outside the tax system if:

•   You make a loss, and

•   Your gross income from income-earning use is less than 2% of the rateable value of the property.

What income is taxable?

You must pay income tax on rent earned from income earning use.  Any rent from private use is exempt from income tax.

What expenses are deductible?

Expenses from mixed-use holiday homes fall into three categories:

1.      Fully deductible. You can claim 100% of any expense which relates solely to the income-earning use of the holiday home. Examples: Costs of advertising for tenants, costs of repairing damage caused by tenants.

2.      Not deductible.  You can't claim any expenses relating to the private use of the holiday home.

For example: Costs of a boat and quad bike stored in a locked garage and unavailable to the non-associated people renting the holiday home.

3.      Apportioned. If an expense relates to both income earning use and private use, you need to apportion it using this formula:

 

Apportionment formula:

 

Expense    ×    ______Income-earning days__________

                      Income-earning days + private-use days              Examples: mortgage interest, rates, insurance

 

Record keeping

Please keep records so that we can work out your tax obligations at the end of the tax year. Your records should show: private-use days, income-earning days, the expenses you paid, and the name of each tenant together with their relationship to you and the rent they paid.

This new legislation changes to way your income shall be calculated. If you can begin your record keeping under the new rules immediately that shall greatly assist in the preparation of your 2014 income tax returns.

Carry forward of Losses

If you make a loss from your mixed-use holiday home, and your gross income from income-earning use is less than 2% of the rateable value of the property, you can not claim the loss in the current year.  You will have to carry forward the loss to offset against income from your holiday home in a future tax year.