New Zealand: Recent Developments 2019

The increasing demand for transparency has resulted in the rushed introduction of the common reporting standard (CRS), with the first reporting cycle in New Zealand having been due for many financial institutions on 30 June 2018.  For lawyers involved in the provision of services in this area this created something of a ‘perfect storm’ of compliance obligations, as lawyers were from 1 July 2018 brought within our (relatively) new anti-money laundering regime.  So it has been a very busy time for lawyers, financial institutions and others. 

Chartered accountants will be subject to the new Anti-Money Laundering (AML) regime from 1 October 2018. 

Foreign Trust Registration and Reporting

New Zealand foreign trusts (i.e., trusts with a New Zealand resident trustee, but settled exclusively by non-New Zealand resident persons) can function as tax exempt vehicles.  These have been in use since 1990 or thereabouts and caused no difficulties.  However, New Zealand foreign trusts were ‘mentioned in dispatches’ in the Panama Papers, and consequently became something of a domestic political football at the time of the release of those Papers. 

Ironically there was very little of real substance in the Panama Papers concerning foreign trusts, but tabloid media (including the International Consortium of Investigative Journalists) and left-wing commentators, did their best to paint foreign trusts in a bad light.

Political reaction to the Panama Papers’ leak was to defuse matters by appointing a one-man commission of inquiry to consider whether the legislative regime surrounding foreign trusts was sufficiently robust to protect New Zealand’s reputation and minimise the scope for misuse. 

The irony of that inquiry is that misuse of New Zealand vehicles has been much more prevalent in the context of ‘plain vanilla’ New Zealand companies, not trusts.

As this became something of a political ‘hot potato’, it became clear that there would not be a lot of rational engagement.  The New Zealand Inland Revenue Department (IRD) and the government did not seek input from those of us providing services in this area to understand exactly what foreign trusts do.  As you might expect, whilst tax neutrality is an attractive feature of foreign trusts, they were generally used as accumulation vehicles for long-term family succession planning, and to protect some wealth of clients who live in unstable jurisdictions with a risk of expropriation of assets, extortion, and so forth. 

The outcome of the inquiry was to introduce a domestic foreign trust registration and reporting regime.  We pointed out to the IRD that this would, for many trusts; result in duplication of reporting if those trusts were captured as financial institutions under the CRS regime, but that point was ignored. 

All New Zealand foreign trusts must be registered with the IRD and must provide copies of trust deeds and information on all settlements and distributions. Information also needs to be provided on settlors, protectors and beneficiaries. The rules applied from 21 February 2017 for new trusts and from 30 June 2017 for existing trusts.

Registration Requirements

Each trust must be registered with the New Zealand Inland Revenue Department within 30 days of establishment (or by 30 June 2017 for existing trusts). The registration requirements include the following:

1. Payment of the prescribed registration fee – currently set at NZ $270.
2. The name of the trust.
3. The date, amount, settlor and nature of each settlement on the trust.
4. The name, email address, physical residential or business address (i.e., not a PO Box), jurisdiction of tax residence and taxpayer identification number of each:
   • settlor;
   • person with a power (or a power to control the exercise of such power) to appoint or dismiss a trustee, to amend the trust deed, or to add or remove a beneficiary;
   • person with a power under the trust deed to control a trustee in the administration of the trust;
   • trustee;
   • For a fixed trust, beneficiary and nominee for an underlying beneficiary (and including the parent or guardian of a minor beneficiary).
5. For a discretionary trust, details of each beneficiary or class of beneficiary (this might simply be ‘the descendants of the settlor’, for example).
6. A copy of the Trust Deed and any amending documents.
7. A declaration from the Trustee that the persons specified in 4(a) to (d) have all been informed of, and have agreed to provide the information necessary for compliance with, the requirements relating to the provision of information imposed by:
   • the Tax Administration Act 1994; and
   • the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and regulations made under that Act.
8. If any of the particulars listed in paragraphs two to six change, notification must be made within 30 days from the date of the change; and if necessary an amended declaration should be filed.

Annual Requirements

The trust must also comply with annual requirements for each return year (within six months of the end of the return year). These include:

1. payment of the prescribed annual fee – currently set at NZ $50;
2. provision of basic financial statements (no consolidation with underlying entities; historical cost is OK);
3. provision of date, amount and nature of each settlement made on the trust in the year, including information on the settlor;
4. provision of date and amount and nature of each distribution made during the year, including information on the receiving beneficiary.

Implications for failure to comply

If a New Zealand foreign trust does not register with the IRD, and/or does not fulfil its associated disclosure obligations, then the trust will lose its exemption from New Zealand tax on foreign-sourced income. This will result in the trust becoming taxable in New Zealand on its worldwide income.

The Register that is established under this legislation is not publicly available. The Register is maintained by the IRD, but the Department of Internal Affairs (AML Regulator) and the New Zealand Police may have access to the information for law enforcement purposes.

In the face of these increased disclosure requirements, it is important to reflect on the fact that New Zealand Government departments are highly reputable and secure. New Zealand consistently ranks among the least corrupt nations in the world – often topping the table on Transparency International’s corruption perceptions index, which ranks countries by perceived corruption levels among public officials and politicians.

Whilst the registration and reporting regime is an annoying piece of additional bureaucracy, one consolation is that reporting under the regime does not result in automatic exchange of information as is the case under CRS.

Client reaction to the reporting regime has been mixed.  In my experience very few clients have ‘voted with their feet’ – but the experience of others may differ.  There have been some movements of clients out of New Zealand but many still remain.  Many trusts did not register, which might reflect the fact that a significant percentage were no longer active or in existence.

For those of a secretive disposition, the irony is that the best place to go to minimise reporting and exchange is the United States. 

Trust Law Reform

A Trusts Bill presently sits before Parliament.  Its content has been considered by a Parliamentary Select Committee which is due to report back in September.  It is likely that the Bill will be enacted later this year, or early 2019.

The Bill replaces the Trustee Act 1956 and the Perpetuities Act 1964 and comes after a very long period of consultation by the Law Commission, which issued a number of papers on Trust Law Reform between 2009 and 2013. 

An exposure draft of the Bill was released in November 2016 for further public consultation. 

It is fair to say that, whilst there will inevitably be provisions in the Bill that practitioners and trustees may not be entirely happy with, the changes made to the law are not drastic; are generally reasonable, and the law reform process was genuinely consultative, with many submissions taken on board in improving the Bill in its final form.

The Trustee Act 1956 was relatively brief with dated language, and therefore to understand the nuances of trust law, there was an inevitable resort to case law and external commentary. 

The Bill is not a codification of trust law however; but it does attempt to make trust law more accessible and understandable for trustees and beneficiaries.  Trusts are used very heavily in the domestic context with an estimated 300,000 to 500,000 in existence today. 

In the explanatory note to the Bill, the following comments are made:

“The Bill clarifies and simplifies core trust principles and essential obligations for trustees to improve understanding about how trusts operate.  Importantly, it also preserves the flexibility of the common law, allowing trusts law to continue to evolve through the courts …

The Bill achieves its policy objectives by providing –

• a description of the key features of an express trust;
• mandatory and default trustee duties [the former not being able to be ‘contracted out of’];
• requirements for managing trust information and disclosing it to beneficiaries of the trust;
• flexible trust powers;
• the circumstances in which trustees must, or may, be removed, and options for removing and appointing trustees out of court;
• clear rules to assist with the variation and termination of trusts …”

Existing trusts will be subject to the new Bill, and it would be prudent for trustees and their advisors to consider the desirability of varying the terms of the trusts to either correlate with the new statutory obligations or to take advantage of provisions contained in the new Bill when enacted.  In particular, with the repeal of the Perpetuities Act and the move to a supposedly simple maximum trust duration of 125 years (previously this was 80 years) most people will be looking at the opportunity to obtain an extended trust duration. 

Part 3 includes provisions on trustees’ obligations to keep and give trust information.  It sets out:

• what core documents must be kept by trustees
• how long they must be kept
• a presumption trustees must provide basic information to beneficiaries
• what factors to consider when deciding whether to give information to beneficiaries or to withhold it

The basic trust information is:

• the fact that a person is a beneficiary of the trust
• the name and contact details of the trustee
• the right of a beneficiary to request a copy of the trust deed or “trust information”
• new particulars when a new trustee is appointed

‘Trust information’ means information concerning the terms of the trust, its administration, its assets – but does not include reasons for trustees’ decisions.

One could argue that these provisions are an attempt of sorts to codify the decision in Rosewood v Schmidt [2003] 2 AC 709, which was followed in New Zealand. 

Whilst these obligations presently exist at common law, they are in New Zealand (as is the case in many jurisdictions) often ‘honoured in the breach’.  Careful thought should be given to crafting trust instruments with relatively ‘compact’ classes of beneficiaries.

Part 3 of the Bill is significant in setting out mandatory and default trustee duties, with mandatory duties unable to be ousted by express wording in the trust deed.  These include, for example, the duty to act in accordance with the terms of the trust and the duty to act honestly and in good faith. 

Default duties must be performed unless modified or excluded by the terms of the trust. 

One important point is the statutory ‘override’ of Armitage v Nurse [1997] 3 WLR 1046, which supported the capacity for a trust instrument to exclude liability except for dishonesty, wilful misconduct or recklessness.  The Bill provides that any exemption and indemnity clause cannot exclude liability for dishonesty, wilful misconduct or (importantly) gross negligence.  Unhelpfully, the Bill does not provide a definition of gross negligence, so it will be up to the courts to define where this threshold sits relative to the concept of ‘ordinary’ negligence.

Paid advisors are required to alert the settlor to any liability exclusion or indemnity clause and to ensure that the settlor understands the meaning and effect of the clause. 

There are provisions in Part 5 of the Bill which are intended to minimise unnecessary and costly applications to court for straightforward or uncontested changes of trustee. The Bill also includes express provisions dealing with alternative dispute resolution (ADR) processes to resolve internal and external trust disputes, even where the trust deed itself may be silent on the use of ADR. 

John Hart
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.