Beneficiary Current Account Balances – The Practical Implications

Sep27

One thing we see a great deal with trusts that have been around for a while is high beneficiary current account balances where the trustees owe beneficiaries quite significant amounts of money.  This has come about through trust income being distributed to beneficiaries who have a lower marginal tax rate as the trustee, i..e income splitting.  Even though the trust income has been distributed the beneficiary never received the funds and they were recorded as a loan to the beneficiary in the beneficiary current account.  Sometimes these balances can be large – over $500,000 in a few circumstances.

These amounts the trustees owe the beneficiaries can cause some serious practical implications as follows:

  1. The amounts are repayable on demand.  This means if a beneficiary asks the trustees to repay it they must.
  2. The amount is an asset in the hands of the beneficiary and should be taken into account when the beneficiary fills in any statement of assets and liabilities, for example when applying for bank loans.  The difficulty here is the beneficiary has no idea they are actually owed the money!

The options to deal with this are limited.  We have heard of some accountants wanting to ‘gift’ off the balances through journal entries which is not advisable as the only person who can actually gift the balances are the beneficiaries.  Also, there is an added complication that if the beneficiaries gift the balances they will also be considered a settlor of the trust under trust law principles.

The best course of action is to be open with the beneficiaries.  With the proposed changes to New Zealand’s trust they are going to be able to obtain this information in any event, assuming there are no further changes before it is finally passed by Parliament.  Sit them down and tell them they are owed money but the trust cannot pay it back but it will be paid back in the future.

TRUST POWERS

Apr17

The Clayton v Clayton decision regarding trustee powers, and other powers, equating to property continues to be very relevant in the trust law area both in New Zealand and overseas.  Effectively the courts are looking at the substance of the relationships between the parties of a trust, but the provisions of the deed of trust are still extremely important in the end result of any court decision.  This can be demonstrated by the following two cases.

Goldie v Campbell: in the New Zealand High Court case the settlor was also the trustee and had the power of appointment and removal of trustees.  Based on Clayton principles on first glance, this would make the trust structure open to attack by third parties based on the power that individual wielded and this was argued in the hearing.  However, the High Court after reviewing the deed of trust ultimately found the trust assets were not relationship property as there were restrictions on those powers and the trust was formed for specific purposes.  The most important thing was that the person holding these powers could not apply the trust assets for his sole benefit which was different to Clayton.

Mezhprom v Pugachev: this was a UK High Court case but it involved a number of New Zealand governing law trusts.  The settlor and discretionary beneficiary in question was also the Protector of the trust and had to give his consent to a number of trustee decisions, including distributions, investment, removal of beneficiaries etc.  The judge in question ruled that the powers held by that person were not restricted and could be exercised solely for his benefit.  As a result, the judge viewed that the beneficial ownership of the trust assets had never been transferred to the trustees as control over those assets had never been given up.

Based on current case law these decisions are hardly surprising.  Neither trusts were considered shams but the trustee, and other, powers are very important, especially if the holder of those powers can exercise them solely for his or her benefit.  We suspect there is a large number of trusts in New Zealand that is attacked in court would fail and the trust assets would be available to settle third-party creditor claims.

Marcus Diprose

As always, the Covisory team is happy to talk to you about your needs, now and going forward. If there is anything we can do to help, please call or email me.

Please note that the information in this article is for informative purposes only and should not be relied on as legal advice.

The Brave New World – What changes are likely from our Labour / New Zealand First Government

Nov03

The past three months has taken New Zealand on a political roller coaster with the result being a new minority government with a new policy and social agenda for the next three years.  In our view, it was always a strong possibility that New Zealand First would go with Labour, and the exclusion of the Greens from the government is political suicide as they sit once again outside of the government and will have little to show for the same level of support that New Zealand First gives to Labour.

Labour identified a number of priorities it would be addressing in its first 100 days and is set to wind back much of the deregulation National introduced. Change is coming and what is going to be interesting is what does this change mean for you as typically a business owner in the context of the post-election New Zealand.

 Taxation
  • The promised tax cuts will not occur.
  • We would expect the top marginal individual rate and the top trust rate to increase to at least 36% and be aligned.
  • The Brightline test for residential property will extend from 2 to 5 years. What will be interesting is which properties this applies to, ie existing own properties or those bought after the law change is made.
  • A tax working group will be put together and involved in public consultation. Its report back will affect taxes from 2021 on.  It will focus on no increases in taxes, and no inheritance tax or other taxes on the family home.  That still does leave the door open for inheritance tax or other taxes on other assets and investments.  We think capital gains is unlikely as a tax, but time will tell.
  • A 12.5% tax back incentive for research and development.
  • Continued focus on multi-nationals. Nothing changes from the old government here and the BEPs programme will continue.
  • A key one will be the removing of the ability to use negative gearing losses. The question is exactly who this will apply to, ie company groups or just individuals claiming the losses in their tax returns?
  • An Auckland regional fuel tax for the Auckland Council and is expected to be implemented within 6 months.
Land
  • Foreign ownership of land is to be subject to greater restrictions and greater involvement of the OIO. The concern here is the OIO is already significantly overloaded and has to date been largely a rubber-stamping exercise anyway.
  • A rent to own scheme for low-income workers to assist them to buy their first home.
Other
  • Expect labour law reforms. Now is a good time to get rid of underperforming staff while you are still able to.
    • The 90-day trial periods, introduced by National in March 09, will be replaced with new trial periods and will require reasons for dismissal and justification.
    • Reinstatement will be the primary remedy for employment grievances.
  • The increase in the minimum wage to $16.50 from 1 April 18 and expectations for it to be moved to over $20 within the next 3 years.
  • Changes to paid parental leave increasing to 26 weeks per year, taking effect from 1 July 18.
  • Immigration restrictions targeting students and low skilled workers.
  • Superannuation to remain at age 65. With the Government resuming contributions to the New Zealand Superannuation Fund to help safeguard Universal Superannuation at 65.
  • Buy Kiwi made preference by the government.
  • Focus on regional development and rail networks, both within Auckland and in the wider sense.
  • A review of the reserve bank with an aim to lowing the New Zealand dollar.
  • Expect inflation to increase with particularly the increase in costs as a result of some of these and the added burden of the increase in the minimum wage. It can only push inflation up.

 

On the whole however, there is much for business and our clients to be happy with and excited by in terms of what Labour and New Zealand First have promising.  It creates opportunities in itself and you need to quickly focus on these to understand where they will be.

If we couple this with the trust law reform, which will still come into effect next year, even under a Labour government, it is going to be a busy year or two as we all get used to significant change in our existing environment.

As always, the Covisory team is happy to talk to you about your needs, now and going forward.  If there is anything we can do to help, please call us.

Please note that the information in this article is for informative purposes only and should not be relied on as legal advice.