Are you ready for the Changes to NZ’s Trust Laws?

If you are a trustee or a beneficiary of a NZ trust it is worth doing your homework.

In late 2017 the new Trusts Bill was introduced to the New Zealand Parliament.  It is expected to become law later in 2019 and it will have some major implications for trustees.  The law changes will have a major impact on how trusts are administered in the future and new trust deeds will need to be carefully considered by any settlor, rather than rely on a template deed that has been in use for twenty years.

So, what are the major changes:

  1. Trustee Duties: the new law differentiates between mandatory duties and default duties.  Mandatory duties cannot be modified (such as duty to know the terms of the trust, duty to act in accordance with the trust terms etc) but the default duties can be excluded by the deed of trust.  This includes duties such as duty to have a general duty of care, duty to invest prudently etc.  It will be very important for any new trust being put in place that before the document is signed a good conversation occurs between the professional drafting the document and the settlor about what should and should not be excluded.
  2. Beneficiaries: under the new rules all trustees must inform every beneficiary they are a beneficiary of the Trust.  They must be informed of the names and contact details of the trustees, whether there are any changes to the trustees, and of their rights to request trust information.  This is a significant change and it must be emphasised that the trustees have a positive duty to do this.
  3. Disclosure of Trust Information: this is defined as information regarding the terms of the Trust (i.e. the deed of trust and all amendments), the administration of the trust and the trust property but does not include trustee decisions.  There is a presumption towards disclosure to beneficiaries unless there is exceptional circumstances and this is following modern common law principles.   
  4. Increase to the Trust Period: currently New Zealand Trusts have a trust period of 80 years.  The law changes revoke the Perpetuities Act and increase the trust period to 125 years.   

What are the practical implications you need to think about?

  1. New Trusts:
    1. As a settlor wanting to put a new trust in place, you need to carefully think about:
      – whether any of the default trustee duties can be excluded
      – who will be the beneficiaries of the Trust, especially when more information will be supplied to beneficiaries in the future
      – where are the trust documents to be kept?
  2. Existing Trusts:
    1. For existing trusts, the deed of trust and trust structure should be comprehensively reviewed, and varied if necessary, for the following:
      – Trustee duties
      – Class of beneficiaries and whether this should be limited going forward as the trustees will need to inform all beneficiaries, they are a beneficiary of the Trust.  A lot of older style deeds have a ‘kitchen sink’ class of beneficiaries to include nieces, nephews, spouses etc.  Clearly this has some major issues going forward. In some older trust deeds there may be no power to remove or appoint new beneficiaries.
      – What information should be provided to beneficiaries once any changes to the beneficial class are complete and the implications of providing that information.  For example, a beneficiary may have a beneficiary current account in their favour which is repayable on demand.  We believe that due to the presumption of disclosure in the new rules, trustees will need to provide to ALL beneficiaries a copy of the deed of trust and the annual financial statements for the trust.  This point alone will result in some significant changes to beneficial classes of trusts in New Zealand.
  3. Can the deed of trust be amended to take advantage of the increased time period for a Trust? It is likely this will not be possible in some older deeds, but more modern deed may have some flexibility to allow this.
  4. Do you really need a trust?  We suspect there are a lot of trusts in New Zealand that are not required and the changes to New Zealand’s trust law is likely to be the catalyst for trusts to be unwound.

We recommend the first step is to thoroughly review the deed of trust as the first step.  Covisory can help you with this so please contact us (+64 9 307 1777) to arrange a time.

What’s going on in our Family Businesses?

Why do a large percentage of family businesses fail when transferring to the next generation?

BMW, Samsung, Fisher and Paykel, Michael Hill International, Smith & Caughey and Walmart are examples of highly successful multigenerational family businesses. Although around 75% of businesses in New Zealand are family-run, the statistics paint a sombre picture for the success of these family businesses surviving into the next generation. What makes these businesses so susceptible to failure?

Although the reasons are varied, you will find several common themes.

Lack of involvement and business education of the younger generations

How can you expect your successor to take over and run your business successfully if you haven’t spent time training him or her?

  1. The failure to actively educate the younger generations around finances and business concepts have resulted in many children being ill-prepared to manage money or to step into a business management role in their parents or grandparent’s business.
    1. By not nurturing a sense of responsibility, history and core family values the next generation lack the understanding of why.
    2. With no education in the Family Business, it is more likely they will have poor decision-making skills. The result is that the family’s capital can be put at significant risk and ultimately the business could fail.
    3. Planning to move the family business between generations will have a greater chance of success if you work for a year or two with your successor(s) before you hand over the reins.
    4. There are excellent benefits for a family business if your children are encouraged to experience working in other unrelated companies, where their abilities can be grown away from the family.
Neopotism

Families who continue to promote unqualified or under qualified relatives into positions of power just because they are members of the founding family are also on a fast-track to failure.

  1. Rather than making your own decisions on who will run the business and then announcing it to the family, a technique we have found to be one of the surest ways to sow family discord, it would be wiser to look at your family realistically and plan accordingly.
    1. Examine the strengths of all possible successors as objectively as possible and think about what’s best for the business.
    2. Do your children or nieces or nephews have the business skills or even the interest to do it?
    3. Consider what happens if there are no family members capable of continuing the business. If this is the case, then your plan needs to focus on the sale of the business at a future point or at least an independent CEO reporting to a board which also contains independent, experienced directors.
    4. The moral of the lesson is to involve your family in business planning and succession discussions.
Case Study 1

One family business we were working alongside was in the process of transferring the management between generations. There was an open dialogue between the generations to ensure that the “child” wanted to acquire the business and understood the financial ramifications.  It was vital that it was the child’s wish to purchase the business and not that of their parents which were forced upon them or imputed to them.

In this case, the child’s principal concern was financial, i.e. what happens if they could not maintain the business and as a result not be able to service the repayment of the debt to the parents?  This can be handled so that perhaps the debt is limited recourse, but the negative is that then removes a valuable asset for the other children.

Typically, the family business represents a very high percentage of the wealth of Mum and Dad when we come to look at succession issues.  If they want to transfer it to some but not all of their children, then it is important that equality between the children is considered.

A lack of family governance structure

Governance issues are avoided by many families because it forces them to confront the possible need for significant changes in how they manage their business. Without a robust framework, family business are easy victims to internal discord and ownership issues down the track.

  1. Governance structures formalise precisely who does what and how.
    1. Having a structure provides a distinct line between family and business, separating family control from the daily management of the business.
    2. Independent, experienced directors and advisers need to be part of this to provide an independent, removed and unbiased perspective.
Failure to start business succession planning early.

By delaying retirement and avoiding putting in a succession plan in place can be further exacerbated by an unexpected illness or sudden death which provides real risk to the business and the family’s financial health.

  1. Planning long term is good. The longer you get to spend on succession planning, the smoother the transition process is likely to be. Consider five or ten years in advance at a minimum.
    1. Proper succession planning can take years whether you bring in outside managers or train up an internal successor.
    2. Succession must look at both planned and unplanned scenarios, the later including situations where a parent or senior family member meets an unexpected and untimely death or disability long before their planned retirement.
Trying to be fair to all 

Get over the idea that everyone must have an equal share or even an equal say. Just because you are a family member doesn’t mean you will get a top job in the company unless you are qualified and competent to do it.

  1. In any business, management and ownership are not necessarily the same thing. For example, you may decide to transfer management of your business to just one of your children but transfer equal shares in the business to all of your children, whether they’re actively involved in operating the business or not.
    1. But trying to be “fair” is a nice idea in theory, but it may not be in the best interests of your business. It may be fairer for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Alternatively, it may be better to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children.
    2. Another option would be to bring in professional managers to run the business while retaining ownership in the family as a whole. Many successful multigenerational family firms do this as it allows them to focus on diversifying and managing their wealth as well as making it easier to navigate generational transitions.
Case Study 2

In this example, the family business was a farm where the “child” that worked the land had got into the ear of Mum and Dad’s independent trustee who also happened to be his chartered accountant.  The parents, owners of the land and farm operation, were convinced to sell it to the child at a low price with extremely concessional repayment provisions including that no repayment of the principal was to be made for ten years.  While there was interest to be charged, again it was concessional.

A large part of the value of the farm was being transferred to a child without equal consideration for the other children.

At the last minute, Mum and Dad did realise there could be an issue and arranged a family conference where the whole exercise was sprung upon the other three unsuspecting children who, to say the least, were somewhat gobsmacked.

Epilogue….In a similar situation, we came across recently a “child” had been sold the family farm at a significant concessionary value. Two years later that child then turned around and sold the farm at an exorbitant profit. The sale and the significant profit made on the sale fractured the family as the first sale had no clawback provisions for subsequent sale profits built into the agreement as the expectation of the parents and the stated intention of the child was to farm for life

When you are dealing with children and potentially transferring an asset to one of them and not the others, the critical concern is to ensure that there is a perception of equality and fairness.  Even if there is to be some benefit for the child, in recognition of past service, endeavour or the like, it is essential that this is discussed openly and in a proper forum within the family or it has the potential to divide the family and poison relationships for the future.

Succession will continue to be one of the principal issues for families owning businesses.  With many baby boomers reaching retirement age, what they do with their business is increasingly weighing upon their minds.  Do they sell the business to third parties?  Do they transfer it to the next generation?  What should they do with it?

For most, there is never one single right answer to this but what is important is to work through a process so the family can see the options and understand the implications of each. 

As always, we are here to assist.

What Brexit Means Down Under

Much to the surprise of experts, governments, and businesses around the world, Britain and Northern Ireland voted to leave the EU in June of 2016. The referendum result shocked not only the UK and the EU, but also the global economy as a whole. Nevertheless, the UK government has been determined to honour the results of the vote, and initiated the Brexit process officially on March 29, 2017, which is set to culminate in the UK’s departure from the EU on March 29, 2019, two years later.

After two years of tense negotiations and internal political wrangling, the UK appears to have made no appreciable progress in establishing the UK’s future economic relationship with the EU, or the rest of the world. As of today, Brexit appears to be progressing toward what was forecast as the worst-case scenario: a no-deal Brexit, in which the UK’s trade relationships would revert to World Trade Organization rules. Such an outcome is predicted to not only devastate the UK’s economy in the short term but may also have significant secondary impacts on its major trading partners around the world.

Why did the UK join the EU at all?

To understand the import of Brexit on a global scale, it’s important to understand the original purpose of the EU. Decades before the EU was formed, the EEC was established by France, West Germany, Italy, and the Benelux countries as a way to economically unite European countries. Close economic and political cooperation was meant to help these countries both to economically recover from World War 2 and to help build long term relationships that would serve to prevent future martial conflicts.

It was this economic community that the UK joined in 1973, after the 1969 resignation of France’s Charles de Gaulle, who had vetoed Britain’s prior attempt to join in the 1960s. When the single market, the EU as we know it today, was formed in 1992, Britain became a part of it by default.

Why Brexit?

Over time, the EU’s influence over its constituent countries grew, even as more and more countries joined. Unlike the EEC, the EU functions as far more than just an economic community, but rather as a loose superstate comprised of 28 countries. The UK government, for its part, found itself torn between the economic advantages of membership, and the vocal opposition of its right-wing voters even since before it ever joined the EEC.

Before it ever considered joining, the UK had planned to reestablish its status as an economic superpower by developing its own Commonwealth trading bloc. For many British voters, joining the EEC, and later being part of the EU was perceived as a humiliation for a country that had, at one point, governed nearly one-fourth of the world’s landmass. Capitalising on this, British politicians have, whenever possible, laid blame for the country’s economic failures on the EU as a whole, while doing their best to claim credit for British successes nationally. As a result, a large portion of UK voters had little or no concept of how the EU-UK relationship actually works, or how it helped the UK. Instead, it has been primarily viewed as a drain on the country’s resources, and an impediment to its success.

The Global Financial Crisis and the Refugee Crisis

Following the financial crisis in 2008, many of Britain’s fears about the bloc seemed to become reality. The economies of Greece, Spain, Italy, and Ireland were in shambles, apparently validating UK prejudices about propping up weaker countries through its contributions to the bloc. At the same time, immigration to the UK increased as other EU citizens, as well as immigrants from outside the EU, flocked to the country in search of work. Under pressure by his own conservative party, which routinely capitalised on vague anti-EU sentiments, Prime Minister David Cameron was forced to agree to hold a referendum on whether the UK should seek to leave the EU or to remain in it, before December of 2017.

Expecting it to offer him a strong pro-European mandate, the Prime Minister went ahead with the referendum in 2016. However, Brexit campaigners, riding a wave of anti-immigrant sentiment following the 2015 refugee crisis, and capitalising on the public’s weak grasp of the EU’s relationship with the UK, won the simple in-out vote 52% to 48%.

The UK’s negotiation nightmare

The UK economy is the second largest in the EU, and its departure represents a serious loss for the bloc. While this does give it some leverage in negotiating post-Brexit trade deals with the EU, the UK has made practically no progress in securing a deal. The reason for this is that Brexit supporters are determined to secure trade terms that are more advantageous for the UK than EU membership was. Effectively, they want to retain all of the benefits of membership, while simply doing away with the associated costs. After all, this was what they had promised their voters.

EU member states, for their part, see little benefit to agreeing to any such relationship. The UK relies on the EU for over half its import goods, and 44 per cent of its export market. This means that future trade complications with the EU could severely damage the UK’s capacity to trade internationally while being merely painful for the EU. Furthermore, the UK is not able to negotiate new trade deals with non-EU countries until after Brexit takes effect, which would force other trading partners to also begin trading with the UK under WTO rules. This could severely impact the UK’s ability to trade competitively until such a time as new trade deals can be made.

This puts Prime Minister Theresa May, and British negotiators in a position where any deal the country can feasibly negotiate will fall far short of what politicians need to satisfy their pro-Brexit constituents. As a result, the country has gone through two years of negotiations with the EU to produce nothing but a single lacklustre draft deal that the British parliament has vociferously rejected.

Most UK businesses have made no preparations

While no clear plans seem to exist for the UK’s economic future, UK politicians appear adamant that a no-deal Brexit will be avoided. As a result, 5 weeks before the final Brexit date, UK businesses are entirely in the dark with regard to how they will be able to continue to operate internationally after March 29. Not knowing what to do, more than half of the country’s businesses have taken no steps of any kind to prepare.

What a no-deal Brexit means in the southern hemisphere

In the southern hemisphere, Brexit manifests primarily as a bureaucratic headache for exporters, as businesses try to work out what existing EU import quotas mean for trade with the UK and the EU after Brexit. Despite this, total trade with the UK is valued respectively at 1 and 2 per cent of GDP for New Zealand and Australia. While slowed growth in the UK might adversely affect some businesses who trade with it, it’s simply not enough to cause larger economic problems.

This doesn’t mean, however, that there is nothing to be wary of going forward. After all, Brexit is just one of a whole list of events that are rattling global financial markets and raising trade barriers around the world.

Global financial markets are vulnerable

The US’ escalating trade war with China has already slowed trade between the two countries noticeably and is making investors increasingly nervous with talks of a recession in the world’s two largest economies. China’s exports in December of 2018 dropped by 4.4 per cent, while imports fell by 7.6 per cent. This, as well as the US’ internal political difficulties, are putting pressure on 5 of the world’s 10 most important financial centres: New York City, London, Hong Kong, Shanghai, and Beijing. These are ranked as the first, second, third, fifth, and eighth largest financial centres in the world respectively.

The growing threat of trade barriers

If the UK fails to secure a deal that would preserve its international trade deals by 29 March 2019, it will automatically revert to trading under WTO rules. With the US and China already imposing major tariffs, this would make the UK the third of the world’s top 5 largest economies to erect significant trade barriers. This will strongly encourage other countries to follow suit, hoping to protect businesses in their own economies. Ultimately, this would make international trade more expensive for all countries, slowing growth and effectively stalling globalisation.

While it will likely have a secondary chilling effect on the world economy, including the economies of Australia and New Zealand, even a no-deal Brexit would be unlikely to cause real damage. In an analysis of Australia’s position in the global economy, the International Monetary Fund (IMF) determined that global conditions might have some negative impact on the country, but would fail to halt its strong growth. While businesses should certainly pay attention to the larger global developments in the coming months, most will remain well protected from any direct Brexit impacts.

TECH Corner – GST Claims on Land Purchases

The compulsory zero rating of land transactions between registered parties has reduced the number of situations where GST can be claimed as an input tax deduction on land purchases. However, GST can be claimed on the purchase of land where it is considered the purchase of a second hand good.

How to qualify for a second hand goods input:
  • The land needs to have one previous owner;
  • The land is in New Zealand;
  • The supply is made by an unregistered person;
  • The supply is by way of sale (rather than a gift or a lease);
  • Payment is made for the supply in the taxable period where the credit is claimed; &
  • The purchaser is registered for GST.

However, where the vendor and the purchaser are associated, the amount of the deduction is limited to the lesser of:

  • The GST component (if any) included in the original cost of the goods to the supplier;
  • 3/23 of the purchase price; or
  • 3/23 of the (GST inclusive) open market value.

The lowest amount is likely to be GST component of the original cost of the goods to the vendor. If a credit is claimed in this situation, it will be important to obtain evidence of the original cost of the land to the vendor.

As always, we are here to assist.