KYC – Know Your Client

The AML Act imposes obligations to ensure NZ businesses, NZ Banks and financial services are not helping facilitate criminal activity. Instead of taking people at face value we now need to know our clients. Are they who they say they are and where did their wealth come from?

  1. All parties to the transaction need to be correctly identified.
  2. This includes verifying identification documents such as a passport, drivers licence or other government-issued identification document.
  3. Other documents that provide proof of the address of the applicant must also be verified.
  4. Identify the source of wealth of the funds being used in the transaction.

 

For our KYC Form please click on this link.

For our Source of Wealth Form please click on this link.

 

 

AML – Are You Ready?

In 2013, the laissez-faire world of New Zealand business as we knew it came to an end with New Zealand playing catch up with the rest of the world.  Phase 1 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“the Act”) introduced new laws to tackle money laundering and terrorist financing.

The Ministry of Justice estimates $1.3 billion of proceeds from illegal activities are laundered through New Zealand businesses each year. The new rules have added in an extra level of regulation that has taken some people in New Zealand by surprise.  However, many countries around the world have already adopted these rules and New Zealand was late to the party.  On a positive note, the rules New Zealand adopted are more robust than many other countries.

As you will know by now under the new laws Banks, Casinos and a range of Financial Service Providers had “practical measures” imposed on them to protect New Zealand businesses and reduce the ability of criminals to benefit from illegal activity. It has taken awhile for these organisations to come to grips with the amount of information (read mountains of paperwork) required to comply with these measures.

In short, every customer’s identity needs to be verified and their source of wealth determined to ensure there is no criminal activity involved.

Phase 2 will see the Bill, when it is passed mid-2017, extend this requirement to real estate agents and conveyancers, many lawyers and accountants, businesses that deal in expensive goods and betting on sports and racing.  The law will come into effect in stages between July 2018 and July 2019 allowing these businesses to prepare for the changes.

One result of the introduction of these new rules is that when applying for an Inland Revenue Department (“IRD”) number for a non-resident/off-shore individual is that you either need to supply a New Zealand bank account number or have completed customer due diligence on the applicant.  In our experience, New Zealand banks are not interested in opening bank accounts for non-residents if it does not result in ongoing income for them, which is the case for most non-resident applicants.  This only leaves one option and that is to have a reporting entity as defined by the Act, carry out full know your client (“KYC”) checks on the applicant.  The process of opening a bank account also takes a considerable amount of time and paperwork compared to previously.

Covisory Trust Services is a reporting entity for the purposes of the Act and governed by the Department of Internal Affairs.  In our capacity as a reporting entity we regularly carry out independent KYC checks for non-resident applicants for IRD numbers and provide the appropriate sign-off for the IRD to allow the application to proceed without having to open a New Zealand bank account.  Assuming the KYC checks do not throw up any untoward results they can be completed relatively quickly.  This is a bonus when the IRD application is urgent.

If you are interested in using this service or just want to talk about anti-money laundering and its possible impact on your business please contact either Marcus Diprose or Nigel Smith (www.covisory.com)

Insight | New Zealand #2 in world for doing business

New Zealand has been rated as the second best place in the world to do business according to Forbes Magazine’s 2015 survey.  New Zealand, improved on its 3rd place in the 2014 survey by one place with Denmark taking the top spot.

Reaching these conclusions Forbes graded 144 nations on 11 factors including property rights, innovation, taxes, technology, corruption and stock market performance.

The report finds that New Zealand offers a transparent and stable business climate that encourages entrepreneurship.

For the full article Forbes Magazine 2015 Survey

 

Insight | Tax Transparency Debate

There has been some interesting recent dialogue in Australia around whether large private companies should disclose the amount of income tax they pay. Proposed legislation would have required private companies with revenue over $100m to disclose their tax contribution. Public companies already have to do this.
The counter debate against this was that it would make the family members vulnerable to kidnapping and being held to ransom. However, interestingly, Dick Smith (former owner of the now defunct retail electronics chain), argued that these families do this already by their ostentatious displays of wealth. Simply saying how much they paid in tax was confirming what people always suspected, ie they had lots of money and probably paid little tax!.
For now, the proposal has been scrapped, but it was an interesting debate.

Insight | Is compliance accounting dying?

We have been amused over the past few years at the growth of the talk around the death of compliance accounting.  The anti-compliance proponents will tell you that Xero and MYOB will soon mean that businesses don’t need accountants, or that the IRD will effectively do your compliance for you.  Neither of these is true.

 

While online accounting packages can certainly reduce compliance, it is still like a car, someone needs to know how to drive it and be willing to do so.

 

We do not believe that all businesses suit using an online accounting package, but even if they do, our recommendation is that they should use an accountant to review both the base recording of the information and the financial reports that are prepared from it.

 

For those that are not willing or able to do it themselves, thank goodness there will still be compliance accountants in the future.

 

The real risk to compliance accounting is not online accounting packages, but where the work is done, ie outsourcing.  With the growth of off shoring, increasingly it is going to be easier to get people in foreign countries with much lower charge out rates to do the actual processing at far cheaper cost than you can currently obtain in New Zealand. Xero and MYOB do not actively explain this.

Insight | Are Family Meetings are worthwhile cause?

From our experience family meetings can serve many purposes. Above all, they start and can continue communication within the family. Whether these are difficult topics or topics that are more routine.
Family meetings are also a good way to educate younger generations around issues like trusts, wills and estates and succession within a business.
In our experience it is never too soon to start holding family meetings and to improve communication.

Insight | New two year bright line tests for land

Just a quick reminder that the new land rules are in effect. These will tax the sale of a residential property within 2 years unless it was a personal residence, subject also to a few other exceptions.

 
The more problematic parts of this have been that:
1. All land owning trusts must be registered with the IRD and obtain an IRD number.
2. In the case of a trust that is an offshore person, the trust must have a bank account in New Zealand.

 
There have been some problems at a practical level obtaining both IRD numbers and opening bank accounts. There have been significant delays in these and consequentially it is important not to leave these to the last minute.

 
If you don’t comply with the new rules and provide IRD numbers or bank accounts, then land transfers cannot be registered. Also, they will effectively become self-policing for the IRD. Sales and purchases will basically be able to be electronically trawled to give the IRD lists of transactions to look at. The problem is that the banks may not actually want these clients as in excuse the IRD is simply forcing them to do its anti-money laundering checks.

 
The final step will be the withholding regime that will apply to offshore persons who dispose of properties within the two years. The proposed amount of withholding tax will be the lesser of:
1. 33% (or 28% in the case of a company) x (the difference between the sale price and the purchase price of the property); and
2. 10% of the purchase price;
3. The net land proceeds after secured creditors are repaid.

 
The purchaser will be required to hold these funds through their lawyer and to remit the money to the New Zealand Inland Revenue Department.

Insight | Real Constraints on Productivity

In the modern world government control and regulation is something that we are all used to let alone the fact that it has been increasing. We are currently confronted with increases in health and safety requirements and all measure of other government regulations and requirements. However, there are two things that urgently need to be fixed if New Zealand is to remain productive, and they are traffic congestion and constraints around building and resource consents.
The traffic one is simple, if you have ever tried driving around Auckland at any time of the day, let alone at peak hour, you will understand the amount of time that is lost simply going no where. This affects me going to see clients and clients coming to see me, but more importantly, it affects those whose livelihoods is based on either going to see customers or who deliver things for a living. It took me 80 minutes to travel less than 10km yesterday as an example.
While we may add more lanes to motorways and improve interchanges ultimately, traffic congestion is becoming a major issue. I don’t know what the answer is, but something has to give soon. With increasing population, it is only going to get worse, notwithstanding the improvements that are being made.
Similarly, the time and effort to get even the simplest of building consents and resource consents sorted is becoming ridiculous. We all don’t want a repeat of the leaky building problems that occurred in the past, but with the housing demand in Auckland, Christchurch and other places it needs to be much simpler and faster to get approval to build. If we don’t, it is going to leave New Zealand in an increasing disadvantage from a productivity viewpoint.

Insight | Disclosure of information to beneficiaries by trustees.

The recent decision in Erceg v Erceg by the Court of Appeal provides guidance on the approach to the disclosure of trust documents to beneficiaries (including bankrupt beneficiaries) by trustees. In our experience, many trustees fail to adequately provide information to beneficiaries about both their entitlement, the financial position of the trust and the decisions made by the trustees.
The Court of Appeal in its judgment set out what it considered to be the position regarding disclosure of information by trustees in the proper course of administration of a trust. In summary, the court concluded:

“The Trustees should approach a request by a beneficiary for disclosure of trust documents as one calling for the exercise of discretion in discharge of the fiduciary duty the trustee owes a beneficiary.
A beneficiary has an entitlement as of right to disclosure of trust documents. Consequently, there is no presumption favouring disclosure. But nor is there a presumption against disclosure.
Whether to disclose, and, if so, the extent of disclosure, are discretionary decisions for the trustee. Thus, if the trustee decides to disclose, the trustee’s discretion encompasses whether the disclosure should be complete or partial (for instance, made with redactions).
In making the decision, the question for a trustee is always: What, if any, disclosure will be better to:
a. ensure the sound administration of the trust;
b. discharge the powers and discretions in respect of the fiduciary obligations the trustee owes the beneficiary, in particular the trustee’s duty to account?
c. Meet the trustee’s obligation to fulfil the settlor’s wishes?”

The courts also noted that an excellent summary of the trustee’s obligations are set out in the case Schmidt v Rosewood Trust Limited [2003] UK PC 26; [2003] 2 AC709. It did however conclude that the considerations for a trustee will be circumstances dependent.

It is our experience that usually trustees do not provide any information to beneficiaries. In addition, beneficiaries are often not aware of their rights.

Based on our extensive experience in the management and trusteeship of trusts, we believe that beneficiaries should be aware that they are beneficiaries of a trust, they should have a copy of the deed, and unless there are compelling circumstances otherwise they should receive summarised financial information on an annual basis and details of trustee’s decisions. It is not necessary however for trustees to provide the basis of their decisions.

This continues to be an evolving area of law and with New Zealand currently going through a review of trust law, we expect there to be significant changes to the future Trustee Act which will actually statutory require certain disclosures to be made. Best practice is going to become standard practice in our opinion within the next few years.

If you would like to discuss this further please contact Nigel Smith or Marcus Diprose

Insight | Taxable! New Zealand Inland Revenue considers proceeds from the sale of gold and silver bullion

The IRD recently released a statement on its view on whether proceeds from the sale of gold and silver are taxable. The Commissioner’s view is that gold bullion bought as an investment will necessarily be acquired for the purposes of disposal. Consequently, any amounts derived on its disposal will be income. The Commissioner considers that the very nature of the asset leads to the conclusion that it was acquired for the purposes of ultimately disposing of it.
Central to the IRD’s view is that gold and silver as a commodity do not provide annual returns of income while being held. They have no use or value in other terms like for instance art where they have an aesthetic value. Such investments are therefore considered to have been acquired for the purpose of disposal, so the proceeds are considered by the IRD to be taxable under section CP 4 of the Income Tax Act 2007.
While there is logic to the IRD’s view, in a world of negative interest rates, it could be argued that perhaps gold does offer a return because it holds its capital value.

If you would like to discuss the possible impact for you – please contact Nigel Smith