Family Business ~ Insight | Charitable Developments

In February 2013 the Ministry of Business, Innovation and Employment released a discussion paper entitled Auditing and Assurance for Large and Medium Registered Charities – Concrete Proposals.  This is the last in a series of papers put out by them addressing the question of audit and assurance requirements for registered charities in New Zealand.

The final concrete proposals basically mandate that the requirement to be audited or will be reviewed based on the operating expenditure of a registered charity.  It is proposed that there will effectively be three tiers of charities involved being:

  1. Registered charities that have operating expenditure of $1m or more for both of the last two financial years will be required to have their financial statements audited.  These are referred to as being “large”.
  2. Registered charities with operating expenditure of more than $400,000 but less than $1m for both of the last two financial years will be required to have their financial statements either subject to a review or an audit.  These will be referred to as “medium” sized registered charities.
  3. Charities with operating expenses for the last two years of less than $400,000 will not be required to be audited or reviewed.

The table below shows the number of charities with operating expenses above various thresholds.  What is particularly interesting however is that there are 955 charities with operating expenditure above $2m per annum in New Zealand.  That is a lot of charities to have that sized operating expenditure.

These rules will apply to all charities whether or not they receive funding through public donations or government contracts.  The reason for this is that it is considered that all charities are publically accountable because they receive an exemption from income tax.  The view is that the foregoing of tax revenue establishes a public accountability to tax payers and the general public and that accountability cannot be met for larger charities without some form of assurance.

The thresholds will be applied to each registered charity.  Some charities will for instance have multiple branches which may be separately registered as charities or be branches of an overarching registered charity.  The thresholds therefore apply to whichever entity or branch is registered with the Charities Commission.

Table 1:  Registered Charities
(as at 6 December 2012)

Operating Expenditure

Number of Charities

Percentage of Charities

All charities 25,109 100%
≥$50,000 10,125 40%
≥$100,000 7,298 29%
≥$200,000 4,944 20%
≥$300,000 3,844 15%
≥$400,000 3,149 13%
≥$500,000 2,702 11%
≥$750,000 1,961 8%
≥$1,000,000 1,556 6%
≥$200,000 955 4%

New accounting standards will apply to registered charities and are expected to come into force with effect from 2015.  This is also likely to be the date that the new audit requirements come into place as well.  It will also likely be an offence for a charity to not comply with the new accounting standards under the Financial Reporting Bill once enacted.

Greenpeace of New Zealand Incorporated

The Charities Commission has also been reviewing charities and registration applications for charities to determine whether they should lawfully be allowed to register as charities within New Zealand.  The key point here is that charities which have amongst other purposes political purposes and ancillary political activities are not permitted to be charities under existing New Zealand Law.  There have already been several cases on this and Greenpeace is the latest in a string of these.

The Charities Commission is charged with determining whether charities that either registered or are applying for registration meet the relevant criteria.  The Charities Act itself doesn’t necessarily change the existing law which is well established and goes back to the decision Molloy v CIR regarding whether political purposes could indeed be charitable.

Without going into the details, Greenpeace was successful in the Court of Appeal and the matter has been referred back to the Department of Internal Affairs and the Charities Commission itself for review.  However, it does show that charities need to be very careful to ensure that they both initially comply with and continue to comply with these requirements.


Family Business ~ Insight | Law Commission – Review of the Law of Trusts in New Zealand

Late last year the Law Commission issued its paper on its preferred approach to the review of the law of trusts in New Zealand.  This is not necessarily what the law will be when the Government looks at this and changes it, but in our opinion it will be fairly close to what they are recommending. The law of trusts is arguably in need of a review because the Trustee Act is based on law as it was in the 1950s.  It has simply failed to keep track of developments in the way we use trusts, let alone the developments in the area of law generally.

The Law Commission has issued a series of five issues papers exploring different issues around trusts.  The summary paper basically encapsulates their views after submissions have been received on these. The scope of the review by the Law Commission is limited to the review of the law that is required for trusts to be established and managed successfully.  This includes the concept of what is a trust, the obligations of those in trust relationships such as trustees, the powers and role of the trustee, the powers of the Courts in addressing these matters and the processes available for resolving disputes.  The objectives of the review are:

  • Modernisation
  • Clarification
  • A more useful and modern Trusts Statute
  • Reduction of administrative difficulties and costs
  • Fairness
  • Fit for a New Zealand context but consistent with International Law

It is proposed that a new trust statute will be introduced and this will include core trust principles from within both the existing Trustee Act but also from common law derived from Court decisions.

As part of this, there will be enhanced trustee accountability.  At present, it is not clear always what the accountability of the trustee as to beneficiaries and others involved with the trust.  It has not always been clear what obligations trustees owe, whether they can avoid liability and how beneficiaries can go about enforcing their rights, if at all.  The proposals set out in legislation Trustees’ duties and the law relating to trust deeds will be clarified so that the express relationships between the parties will be clearer.

One negative aspect of the proposals is that the Law Commission proposes that the office of the Public Trust is used as an independent expert and supervisor of trusts so that parties can go and obtain advice and also to resolve disputes.  While we favour the use of independent parties to do this, it should be noted that the Public Trust is now effectively a privately owned organisation and as such competes with many other trustee companies.  We think therefore it is likely that the role of the Public Trust will be changed so that it is potentially an expert opinion or a panel of expert firms with trust experience.

Without going into the details to any great degree, there are a few points that you certainly should be aware of in relation to trusts:

  1. Trustees under these proposals will be required to be far more diligent and far more involved in the operation of trusts.
  2. Their requirement to provide information to beneficiaries will be a lot greater than it is at present.
  3. It is proposed that directors of companies which act as trustees can be personally liable for debts of a trust in the same way as individual trustees are at present.  In effect there is a proposal to lift the corporate veil.
  4. That there will be certain mandatory provisions imputed into every trust deed.  It will not be possible to legislate out of these.  One of these for example will be the duty to avoid a conflict of interest.  On the face of it, this is pretty benign, but it could mean for instance that a trustee may not be able to buy or sell property personally from the trust.
  5. Each trustee will also be required to retain documents relevant to the trust such as a copy of the trust deed, any variations, a list of all assets currently held as trust property, records of trustees’ decisions and contracts entered into by the trust as well as financial statements.  These will be required to be kept by each trustee under the proposals.


On the whole, we agree that there is a need for a review of the current law of trusts and that the current laws do not in fact fairly reflect and govern the way trusts are used and operated in New Zealand.  Overall we support the conclusions reached and think that they are fair and reasonable and do create a degree of accountability.  However, there are a few areas that go too far and in particular some of the imputed requirements and particularly the use of the Public Trust go too far.

The only good news out of all of this is the proposal to increase the perpetuity period (the maximum life of a trust) out to 150 years.  So not everything is bad and overall we think that the proposals will be acceptable and workable.  There will certainly be trusts which will be adversely affected by these proposals, but they are the ones that probably need to be, given that they are probably not being administered correctly.  For those properly administering their trusts, there will be little to fear in the new proposals and potentially some benefits.

We will continue to keep you abreast of these developments and when the new Trusts Act is eventually enacted, and will work with you to review your trust to ensure that you are both compliant with the new law and obtaining the maximum benefits from it.  As always if you have any questions please don’t hesitate to contact us.

Family Business ~ Insight | Australia – Transfer Pricing Developments

Taxpayers doing business in Australia or with Australia through associated entities should take note of the new Transfer Pricing Legislation that was introduced to Parliament. The effective date of the new legislation is 01 June 2013 or the date on which the legislation receives royal ascent whichever is the earlier. In light of the new legislation it is advised that transactions between related parties are carefully reviewed. The review should focus on correct documentation of the arm’s length standard. Particular attention should be given to intra-group financing arrangements as this is a complex area that interacts with the thin capitalisation regime. In essence there is the requirement to establish the arm’s length price of debt.

The main points covered by the proposed legislation are as follows:

Arm’s Length Principle

  • Whilst it is a well-accepted principle that transactions between associated persons must be at arm’s length, taxpayers will be required to assess that this in fact is the case in relation to their Australian operations.  Basically related party transactions must be carried out on same/ similar terms as if the transactions were carried out between independent parties.


Reconstructive Powers

  • The new legislation gives power to the Commissioner to disregard and reconstruct transactions. The reconstructive powers are available in “exceptional circumstances”. Exceptional circumstances will exist where the transaction would not be entered into between unrelated parties and where a difference exists between the substance and the form of the transactions. The term” exceptional circumstances” is broad enough to allow the Commissioner flexibility in interpretation. Given the current climate and government’s drive to collect revenue, one can be almost certain that this power will readily be used by ATO.


  • Whilst there is no requirement to keep transfer pricing documentation in line with the new regulations, taxpayers who do not keep adequate transfer pricing documentation, will not be able to argue that they have adopted an acceptable and reasonable position. This will result in tax shortfalls and harsher penalties being imposed by the ATO. At a practical level, often the level of documentation required is not complex or hard to put together so if you don’t have documentation it is recommended that you contact us so we can advise you as to the minimums required to at least try and protect your position.

Statutory Limitation

  • New legislation proposes a shorter time limit of 7 years of assessment during which a transfer pricing adjustment can be made. This is a welcomed approach as the current transfer pricing legislation does not prescribe a time limit.


In summary, it is recommended that all intra-group transactions and policies be reviewed, carefully documented and carried out on arm’s length basis. If you wish to discuss and/or assess any potential exposures your business may be facing or require any further information on this topic, please do not hesitate to contact us.

Family Business ~ Insight | Alesco Case

The recent IRD’s win in the Alesco tax avoidance case is a clear indication how far the tax law has moved.  The case involved an Australian company Alesco, which acquired two New Zealand companies. The acquisition was financed through the use of optional convertible notes (OCN). OCN is a hybrid financial instrument that consists of debt and equity component.

Alesco could have financed the acquisition using either interest bearing debt or the OCN. Income tax legislation allows a deduction for interest should interest bearing debt be used. There is a special determination, issued by the Commissioner, which prescribes how the OCN is to be treated for tax purposes and prescribes a calculation methodology for notional interest deduction.

The alarming issue resulting from the decision is the fact that the IRD has invoked anti-avoidance in relation to a genuine commercial transaction just because Alesco has chosen the means of financing that IRD did not like, on the grounds that Alesco apparently did not suffer a real economic cost – i.e. because the interest deduction they claimed pursuant to the IRD’s own determination was notional. We find it really hard to understand the logic that was applied by the IRD and the Courts given the fact that the determination, written by the Commissioner, specifically prescribes the tax treatment of OCN and a methodology for quantifying a NOTIONAL interest deduction. Notional means fictitious.

Furthermore, the use of OCN as means of financing resulted in Alesco obtaining a lesser interest deduction than if an interest bearing debt was used.  The sad reality is that Alesco has in fact chosen a financing option in relation to a genuine commercial transaction that resulted in greater tax payable than if an alternative means of finance was used and yet was penalised for this.

Another alarming issue, besides understanding how anti-avoidance provisions can be applied to a commercial transaction where the highest amount of tax is paid, is the fact that the Commissioner or Courts did not allow Alesco the next best alternative. One would hope, in societies where the tax system is fair and just, that the taxpayer would have at least been allowed a reconstruction using next best alternative. This however was not case here.  Even though the counsel for the tax payer has clearly pointed out that higher amount of deduction would have been available for Alesco if interest bearing debt was used. The Courts have rejected this argument on the grounds that there was no documentary evidence that interest bearing debt was contemplated by Alesco.  The IRD and the courts therefore simply denied the notional deduction with no reconstruction.

What does all this mean?

This clearly indicates that the environment is more uncertain than it ever was. The Commissioner and Courts are stretching the boundaries in applying the legislation as they deem fit depending on which way the wind blows. Furthermore, this demonstrates that the Courts and the Commissioner are more interested in paper evidence (i.e. notes, minutes from directors meetings) rather than common sense and what is actually prescribed by legislation.

There is no need to highlight that our country relies heavily on foreign investment and jobs that are created as a result of foreign investment. The government should therefore stop and look at what is happening. It should put a stop to the Commissioner’s total disregard to commercial transactions and her almost unlimited power to invoke anti-avoidance legislation as and when she chooses to do so. Anti-avoidance provisions are specific provisions and should be applied where avoidance is present. It should not be used where genuine commercial transactions exist, which are structured in a way that results in a greater tax payable than if an alternative structure was used.

This total disregard creates a great uncertainty for foreign investors and may result in them choosing alternative more favourable jurisdictions. There is obviously no need to say what this would mean to our economy and our jobs. Moreover, it will make both taxpayers and their advisers question what is legitimate tax planning in this modern world.

In summary, this case resulted in a horrible outcome and a greater uncertainty for tax payers. If you are considering any transaction of sizeable value, make sure that you have a documentary evidence of alternatives you have considered. The only alternative way to obtain a certainty, in relation to a transaction you may be considering, is to obtain a ruling from the IRD.