What is a Foreign Trust?

A foreign trust is one where there has never been a New Zealand resident Settlor. (a
“settlor” is usually the person who creates the trust by putting their personal assets
into it).

A non-resident can settle a trust that has non-resident beneficiaries, but has a New
Zealand resident Trustee. These trusts can be trust-effective in certain offshore
jurisdictions. However, such trusts are not treated as New Zealand trusts because New
Zealand taxes trusts based on the residence of the Settlor, not the Trustee, as do other
jurisdictions.

The Trustees are only taxable in New Zealand on income that has a New Zealand
source. However, the Trustees will only be eligible for a tax-exemption on the Trust’s
foreign-sourced income if they register the Trust with Inland Revenue.

Historical Perspective

Over a year ago foreign Trusts became a “hot potato” following the release of the
“Panama Papers” regarding New Zealand’s involvement in the foreign Trust “industry”.
The furore over the foreign Trusts in the past couple of years and the suggestion that
they were used as a ‘tax dodge” was clearly misdirected because such Trusts in general
do not have New Zealand sourced income and therefore have no exposure to New
Zealand tax. However, the way in which New Zealand tax law is applied to foreign
Trusts, coupled with New Zealand’s legal environment and previously minimal
disclosure requirements, made New Zealand attractive to wealthy foreigners seeking to
hold assets through offshore Trusts, and so avoid their tax obligations in their country
of residence. The Panama Papers highlighted the reputation/risk this has caused to
New Zealand.

New Zealand does in fact have a substantial foreign trust industry. Inland Revenue
records indicate that approximately 12,000.00 foreign trusts with a New Zealand
resident trustee have filed an IR607. The Department estimates that the New Zealand
foreign trust industry generates approximately 24 million in revenue per annum,
although this may be as much as 50 million per annum.

Accordingly, substantial changes to foreign trusts were introduced over 10 years ago
and since 1 October 2006 the New Zealand resident Trustees of foreign trusts have had
to disclose certain information to Inland Revenue within 30 days of the creation of the
Trust or a Trustee’s arrival in New Zealand. This is achieved by the use of form IR607-
“Foreign Trust Disclosure” and must include the following information:

The name or other identifying particulars of the Trust.
The name and contact particulars of the resident foreign trustees.
Whether the Settlor is a resident in Australia; and
If relevant, the basis of which a Trustee claims to be a qualifying resident
foreign Trustee.

Current legal position

Following disclosure of the Panama Papers, the “Shewan Report” was commissioned by
the Government, which recommended administration and disclosure changes for
foreign trusts. These have now been incorporated in the Taxation (Business Tax,
Exchange of Information, and Remedial Matters) Act (21 Feb 2017), which requires the
following additional information to be supplied to Inland Revenue:

Details of each settlement made on the Trust (other than “minor services”
provided to the Trust for less than market value);
The name, address, jurisdiction and tax identification number of every Settlor,
and every person with a power to add or remove Trustees or beneficiaries;
Details of beneficiaries; and
A copy of the Trust Deed and details of any alterations.

The above details must be properly registered with Inland Revenue (using IR 607A and
900A) within 30 days of the Trust being established at a cost of $270.00 and future
annual returns must be filed at a cost of $50.00.

Where the New Zealand tax Trustees of a foreign Trust do not comply with either the
registration or annual return requirements, the foreign Trust will be subject to a New
Zealand income tax on its worldwide income. However, if the breach was inadvertent
and was corrected immediately, then this sanction will not apply.

Foreign trusts in existence as at 21 Feb 2017 needed to register by 30 June 2017. If
not, provided certain conditions are satisfied, the registration period is extended a
further 4 years from the date the trust was established.

The current sanctions for intentional non-compliance (a fine of up to $50,000.00) will
continue to apply. Extreme care and vigilance is therefore needed.

Taxation

Determining, and accounting for, distributions made by a foreign trust can be
extremely complex. What beneficiary distributions are taxable and which are tax-free
is subject to an “ordering rule”, which says that distributions are treated as coming in
first from taxable reserves before they can be applied against non-taxable reserves.

As the accounts of such a Trust are not always prepared with this ordering rule in mind,
which is especially the case when dealing with New Zealand resident beneficiaries of a
trust established overseas, this can be very difficult. That difficulty is compounded
because often the trust’s accounts are not prepared in English.

Immigrating Settlors – what happens if one arrives in New Zealand and stays?

When the Settlor of a foreign trust becomes a New Zealand resident, the trustees have
12 months to elect that the Trust be treated as a “qualifying trust”. If no election is
made, the Trust becomes a non-complying Trust with significant additional tax payable
by its beneficiaries on asset distributions to them (i.e. 45%).

Conclusion

A lack of care by trustees of a foreign trust may quickly result in non-compliance with
our tax laws. If you haven’t already done so, we strongly urge all trustees of a foreign
trust to engage legal and accounting advice immediately, and if you have, to ensure
regular annual trustees’ meetings occur with both your trust’s legal and accounting
advisors present.

Every situation is unique so please discuss your particular case with a professional advisor who can provide you with a tailored solution. Please contact Pat Rotherham at Parry Field Lawyers patrotherham@parryfield.com or 03 348 8480

To lease a premises in conjunction with purchasing or starting your own business can be a daunting prospect – often with good reason.

What’s my exposure?

A good starting point for your likely “exposure” is to simply multiply the annual rent and outgoings you are required to pay by the length of your lease as follows:

Assume a five year initial lease term at (say) $50,000 plus GST a year. Add in other property expenses such as rates, insurance and maintenance totaling (say) $8,000 a year, and you get:

$57,500 x 5 years + $8,000 x 5 years = $327,500.00.

This example illustrates that, like buying a house, signing a lease requires care and attention – including asking yourself the basic question: “How am I going to meet these obligations?”

Many tenants also don’t understand that when they sign a seemingly innocuous Agreement to Lease (most commonly in the form published by the Auckland District Law Society (ADLS)) they are usually also agreeing to be bound to the much more fuller terms of the ADLS Deed of Lease – i.e. the terms of the lease are effectively ‘struck’ or finalised as soon as the agreement is signed.

For these reasons, we strongly recommend you consult your lawyer before you sign any lease agreement.

Tips for negotiating a lease

Some particular areas you should turn your mind to when negotiating a lease include:

Check the Plan and Car Parks

Make sure the agreement contains a detailed plan of the premises including any common areas which you will have the right to use. You should be clear as to who else might have access to these common areas, and how that could impact on your use of the premises.
Any plan should also include car parks, and should specify which car parks will relate to your premises (ideally those directly outside your premises).

Final Measurement of Premises

Does the agreement contemplate a final measurement of the premises and if so, does this potentially affect the proposed annual rent?

Lease Schedules

Often the “premises condition report” and “list of landlords fixtures and fittings” schedules are not filled out in the agreement to lease. You should insist these are completed as they may avoid a dispute on expiry of the lease as to what degree of reinstatement of the premises is required, and also “who owns what” in terms of whether fixtures belong to the landlord or the tenant.

Business Use

Make sure the “business use” set out in the lease matches your intended use for the premises, and potentially any different use in the future – the relevance is that if the intended business use is not covered, you will need to approach the landlord for consent to change this.
In addition, make sure that your business use is permitted under the relevant City/District Council Plan (you may require specialist advice to determine this). If not permitted “as of right”, you might need a resource consent to carry out your proposed business activity.
You will also need to make your own determination as to whether the current state of the premises are fit for your particular use. If there is to be a change in the building’s use after you move in, its possible the premises require upgrading – which could come at a substantial cost (and usually a big surprise). An example might be changing from a retail shop to a restaurant/cafe – the latter will likely require (at a minimum) disabled toilets – and any upgrade will be the tenant’s, not the landlord’s, responsibility under the lease terms.

Don’t forget outgoings

Make sure you check the estimated annual outgoings for the premises. Since the Canterbury earthquakes, premiums for commercial buildings have increased significantly and the tenant is expected to bear these in full. In addition, be clear on what the excess under the landlord’s building insurance policy is. Some leases will limit the tenant’s contribution to $2,000, but others make the tenant liable for the full amount of the landlord’s excess. For older buildings, this is often expressed as a percentage of the overall building value, and can be extraordinarily high.
Be aware as well that in addition to funding the landlord’s insurances, you will separately need to insure your own business assets and risk.

Repairs and Maintenance

You should read the maintenance provisions of the deed of lease carefully, as tenants are often surprised to learn they are liable for most repairs, unless they are structural or due to a defect in design or construction of the building.

“Make Good” at Lease End

Make sure you are aware as to what reinstatement obligations you have at the end of the lease. The standard ADLS provisions provide that tenants can remove additions/alterations they have made on the basis that they “make good” any damage to the premises in removing them. Even if you don’t want to remove them, the landlord can still require you to remove such items.
It is helpful to try and anticipate at the outset of the lease what a sensible position on termination would be – for instance, it is often better to negotiate that your fit out will vest in the landlord without compensation at lease end, so that you are not later required to remove it (because the value of the fit out at the end of the lease will often be less than the cost to remove it/reinstate the premises).

Guarantees

You might be able to renegotiate the terms of any guarantee – for example, if your spouse or partner is named as a guarantor but doesn’t work in the business, you could argue he or she should be excluded from the guarantee.

In addition to these matters, your lawyer will be able to take you through the standard terms of the ADLS Deed of Lease and fully explain your rights and obligations including rent reviews, assigning your lease and damage to the premises, as well as what happens if you are unable to pay the rent.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Tim Rankin at Parry Field Lawyers (348-8480) timrankin@parryfield.com

Parry Field Lawyers are pleased to release “Social Enterprises in New Zealand: A Legal Handbook” by Steven Moe. The book is a first of its kind and is intended to resource the Social Enterprise sector with useful information relevant for Social Enterprises. It is available as an eBook or a printed copy.

The 100 page book features and introduction by Alex Hannant, the CEO of Ākina Foundation and covers a range of topics such as:

what Social Enterprises actually are;
the different forms of legal structure they can take in New Zealand;
options for reform of the Social Enterprise sector; and
useful information for Social Entrepreneurs.

To get the ebook click here

Printed copies will also be available to those who would like one with a suggested donation of $5 to the Parry Field Charitable Foundation (you can learn more about that registered charity here).

Comments from a few advance readers are set out below.

If you find this resource helpful then please consider joining us in spreading the word to others by sharing this page on social media (see icons above) or emailing the link to one or two other people.

Comments from advance readers of the book:

This is one of the clearest and succinct summaries of issues around Social Enterprise I have read. It is a great resource for those entering into Social Enterprise and a good reference for those already involved.

Peter Townsend
CEO, Canterbury Employers’ Chamber of Commerce

Social Enterprise is becoming increasingly important in New Zealand as we work to solve our complex social and environmental issues. This handbook is an excellent starting point for anyone interested in learning more about social enterprise. I hope it will stimulate discussion and understanding of what is a very exciting opportunity for social and economic development in our country.

Louise Edwards
Chief Executive, Rātā Foundation

Our world has changed. It is now time for New Zealanders to take social enterprise and social impact seriously. This book clarifies the meaning of social enterprise and begins to show organisations how they can have a real positive impact on society. It is an excellent start to enable us all to move collectively to a new way of doing business.

Dr Rachel Wright
Director, Centre for Entrepreneurship
University of Canterbury

A great starter booklet for those wanting to get a basic understanding of social enterprise and the issues and opportunities for making it blossom more fully in New Zealand.

Dr James E. Austin
Eliot I. Snider and Family Professor of Business Administration,
Emeritus Co-Founder Social Enterprise Initiative Harvard Business School

I found Steven Moe’s book both interesting and valuable and believe it will stimulate discussion and further progress in this important area of social and economic development. A strong economy that marries sound business practice with social purpose will mean a more resilient New Zealand.

Dr. John Vargo, Executive Director
Resilient Organisations Ltd

This clearly written handbook is full of practical guidance and thought-provoking insights for social entrepreneurs and their advisers.

Professor Matthew Harding
Chair of the Charity Law Association of Australia and New Zealand

Steven Moe’s book serves to demystify the fast growing social enterprise sector, making it more accessible to both the practitioners and the curious. There is an unnecessary divide between the purely commercial and the charitable, and when they come together some of the most challenging social and environmental issues can been solved and we getting a little bit closer to building a more diverse and inclusive society, where everyone has the opportunity to participate on an equal basis.

Michelle Sharp, Chief Executive Officer
Kilmarnock

Excellent answers to common questions facing the growing number of humans waking up to the new way of thriving in business. I’m excited about the time when this is a history book, marking the time when global business began the paradigm shift to all business being ‘business for good’. Thank you Steven for being a powerful part of this change in New Zealand.

Kit Hindin, Start-Up Activator
Ministry of Awesome

I think the book will make a very valuable contribution to the emerging discussion about social enterprises in New Zealand, and how we can create a better eco-system that will allow them to flourish. I commend the book to anyone who is interested in exploring how we can remove barriers to finding innovative solutions to some of New Zealand’s pressing problems.

Susan Barker
Co-author of The Law and Practice of Charities in New Zealand,
Director of Sue Barker Charities Law, Wellington

At last a lawyer’s perspective on the social enterprise sector in New Zealand. Steven Moe’s book provides valuable and useful information for social enterprise practitioners on how to approach the messy legal and regulatory environment faced by the sector. It is a welcomed addition to New Zealand’s social enterprise literature.

Lindsay Jeffs, Director
Social Enterprise Institute

This is an excellent resource for the growing social enterprise sector in New Zealand! Parry Field are leading by doing, which is what this sector needs most right now.

Camia Young
Founder of Ohu Development

An easy to read book that touches on key topics that will surely stimulate a lot of discussion at both theoretical and practical levels among the New Zealand Social Enterprise community.

Dr Sussie Morrish, Associate Professor of Marketing
Department of Management, Marketing and Entrepreneurship University of Canterbury

Steven Moe has written a very readable, practical and accessible primer for all those interested in driving social change in New Zealand through the application of sound business principles. I congratulate Steven on his proactive leadership and heartily recommend his legal handbook, “Social Enterprises in New Zealand,” to social enterprise stakeholders in New Zealand and throughout the world.

Marc J. Lane
Author of “The Mission Driven Venture: Business Solutions to the World’s Most Vexing Social Problems.”
The Law Offices of Marc J. Lane in Chicago.

This is a landmark piece of work for the emerging social enterprise scene in New Zealand. This resource will be a great conversation starter to help build this community in NZ. Great leadership on the start of this journey. Kapai!

Tim Jones
Grow Good/ B Corp Ambassador

A big change that we have seen over the last few years is with the number of people looking to include values and a purpose within their early stage enterprises. Often these entrepreneurs don’t have the knowledge of the legal options and this “legal handbook” will not only reduce time spent but also minimize costly errors. The handbook also gives a great overview on a number of questions which are important for New Zealand to tackle over the next few years.

Geoff Brash
Founder, GBJ Innovation
Organiser/Facilitator/Mentor, Startup Weekend

An excellent “Field Guide” to social and business structures; what they are and how they work. Steven outlines a path through a very complicated maze of options. Disruptive technologies (exponential and otherwise) are having a significant impact on traditional structures. It is time to rethink how social focus can be most effective.

Rob Lawrence, R & D Specialist
Canterbury Employer Chamber of Commerce

Social Enterprises are becoming an increasingly popular topic of conversation. But with a variety of different meanings attached. Steven Moe provides a very helpful attempt to add clarity to our conversations, to explore some creative options and to point us to some helpful resources.

Alistair Mackenzie
Teaching Fellow, Laidlaw College
Author of “SoulPurpose: making a difference in life and work”

This helpful text comes at an exciting time for social enterprise in New Zealand. We need to use this opportunity to talk about the path of existing social enterprises and about the possibilities across the social enterprise spectrum. We need to help the current not for profit sector gain the skills and experience to explore enterprise. And we need to understand the role of the private and philanthropic sectors in providing capital and support.

Jenn Chowaniec
Trust Coordinator, Wayne Francis Charitable Trust

The label ’social enterprise’ seems to be very ‘on trend’ at the moment – however defining a ’social enterprise’ still remains reasonably elusive. In a country where many businesses have always operated in a socially good way without seeking recognition or formalising business models – this book will help us look at our unique way of doing business and I hope gather conversation to ensure our communities and governments insist Aoteoroa not only does ‘business for good’, but is a leader in the business transformation.

Jo Blair
Founder of Brown Bread

This is an incredibly poignant time to really kickstart this conversation: Canterbury is full of talented and dedicated people working in the ‘social enterprise space’, but oftentimes without a legal structure that really works for them. As leaders, customers, volunteers and commentators in this space, we have all grappled with this particular question – so we’re fortunate to have this piece of work aggregate some of the common opportunities and challenges to enable us to move forward. Onwards and upwards!

Erin Jackson
Director, Narrative Campaigns

This is a “must have” for anyone looking to start up their own social enterprise. It’s a great snapshot of the Social Enterprise legal landscape leading up to the 2017 SEWF and I can’t wait to see what opportunities exist for Aotearoa New Zealand afterwards.

Anthony Rohan
Enspiral Accounting

This book pulls everything you need to know to set up a social enterprise from a legal perspective in a way that is easy to read and understand. It will serve as a reference point for much of our decision making and is a must if you are setting up in social enterprise.

Rebecca Parnham
Co-founder, Krama & Co.

Social enterprise is the future, and this book provides a great launching point for practitioners and their advisors. Thank you for providing this insight and snapshot, Steven!

Anna Guenther
Chief Bubble Blower & co-founder
PledgeMe, a crowdfunding social enterprise

Around New Zealand, there are hundreds – if not thousands – of charities, entrepreneurs, communities, and whanau, investing their time, energy, passion, and resources into social enterprise. They are doing this as a means to end. A means to include more people in the economy, to regenerate the environment, to create and redistribute resources, and to innovate around intractable problems. To say, ‘we are empowered, equal, creative, caring, determined, optimistic, and we are taking charge of our future’.

Social enterprise can do all of these things and represents a systems solution to many of the complex challenges we face. Social enterprise is business but it is business in service to people, conducted in a very human way. It is also a movement that is growing, global, and entirely relevant to the fast changing world we’re moving into.

The individual social enterprise work going on in New Zealand is excellent; world-class. But what we have lacked up until now is the connectedness, intention, knowledge, and coherence that will make our collective effort more productive and powerful. We have lacked the presence of an identity, the guidance of good information, and the grunt of a supporting infrastructure.

This report helps to start solving this problem, giving sound advice and informed guidance for people finding their way in social enterprise as doers, supporters, or customers. It comes at a time when exciting progress is being made across our emerging sector, and contributes to a more strategic approach to building a world-class environment for more social enterprises to startup and succeed.

Ākina’s mission is to contribute to a sustainable, prosperous, and inclusive New Zealand through the growth of social enterprise. We applaud and welcome important resources such as this, which will help bring about these goals.

To access the book click here!

Alex Hannant

CEO of Ākina Foundation

Why do people form Family Trusts?

People form family trusts for a wide variety of reasons – most commonly these tend to be for the purposes of:

protecting personal assets against business risk;
maintaining control over the distribution of assets within a family after death; or
safeguarding against relationship property claims.

We also receive enquiries from clients from time to time asking whether a family trust can assist in preserving their eligibility for rest home subsidies should they need care in the future. We have always stressed that this has never been a particularly good “primary” reason for forming a family trust – though trusts have on occasion proved useful for this purpose.

However, the policy approach to trusts taken more recently by the Ministry of Social Development (MSD) – backed by a decision of the New Zealand Court of Appeal – means that trusts are becoming less and less effective when it comes to rest home subsidies.

Background

Before gift duty was abolished in 2011, it was common for people to sell their home to a family trust in exchange for a “debt” back to them for its market value. While the debt remained a personal asset, this was then forgiven (or “gifted”) in annual increments of $27,000 per person (or $54,000 per couple), being the maximum amount a couple could gift without incurring gift duty.

This proved a reasonably effective method of transferring assets from personal ownership to trust ownership. Once a debt was forgiven in full, the home could be excluded as a personal asset when an application for a rest home subsidy was made – with the effect that some people then met the asset thresholds for obtaining a rest home subsidy (currently $224,654).

The annual “cap” on gifting meant that it still took considerable time for the trust to obtain outright ownership of the assets – for example if, including property and business interests, a couple owned $1 million of assets, it would take nearly 20 years to forgive this debt in full.

Once gift duty was abolished, while larger gifts were now permitted, the $27,000 per annum gifting restriction remained in force under the Social Security Act 1964. Hence for those couples wishing to preserve their future eligibility for a subsidy, it was business as usual. Or so many thought…

Bridgford v MSD

In 2013, the Court of Appeal in the case of Bridgford v MSD* determined that the maximum amount a couple could gift in any year was in fact $27,000 per couple, and not $54,000. This has effectively doubled the length of time it would take a couple to transfer their personal assets to a trust.

For those who had up until Bridgford been gifting an annual amount of $54,000, the “excess gifting” over and above $27,000 would be considered a “deprivation” of the couple’s assets at the time an application for a rest home subsidy was submitted – these amounts would then be added back to the couple’s personal assets, and if the asset threshold was now breached, they would be denied a subsidy.

On top of this, allowable gifting carried out within the five-year period prior to a person or their spouse going into rest home care is capped at $6,000 per annum. So if you happened to still be gifting $27,000 per year at any time within those five years (and bearing in mind that calculating when you might require care is not something you can generally predict in advance!), $48,000 in each of those 5 years (so $105,000 in total) would be added back to your personal assets.

Effect of the Bridgford decision and MSD policy

The Bridgford decision issued around the same time as MSD were increasing the rigour applied to applicants who had transferred assets to a family trust. It would be fair to say that vigilance has continued unabated since Bridgford, the effects of which now include:

Even where clients’ assets are largely comprised of their family home, the length of time now required to effectively divest themselves of assets has in many cases proved a disincentive for clients forming a family trust for this purpose.
Established trusts with a long history of gifting at $54,000 per annum (pre-Bridgford) may discover the process has been ineffective for the purposes of qualifying for a rest home subsidy, such that it may even be advisable to wind up the trust.
Where clients own few assets over and above the trust property, having a trust can even put you in a worse position than if you did not. This is most commonly seen where one client goes into rest home care and their spouse is still living in the trust property. In these circumstances, one of the asset threshold options – which allows the “family home” to be disregarded in assessing the couple’s assets – is not available, because the home is owned by a trust, and is no longer their “home”. We have seen this cause major distress to clients, particularly where they have few other savings to fund their rest home care.
There are other “tools” open to MSD in denying clients who have a family trust a rest home subsidy. So in addition to asset-testing, MSD may also determine whether the applicants have, by placing assets into a trust, denied themselves of any “income” they could have derived from those assets. This again has implications as to the extent to which clients are required to pay for their own rest home care.

MSD have a clear policy directive to ensure that where people have recourse to assets or income (whatever the source), they use those assets to pay for their own rest home care. In light of this policy – now backed by the New Zealand Courts – MSD’s approach to trusts is likely to become increasingly “combative” – and those relying on family trusts to obtain a subsidy could well end up disappointed.

Family trusts may of course still prove useful for purposes unrelated to rest home subsidies. Indeed, the abolition of gift duty has in many circumstances allowed much larger gifts to be made to family trusts than had previously been the case. In addition, depending on the level of gifting/potential deprivation, in some circumstances trusts may still prove effective in preserving a person’s eligibility to a subsidy.

The application of the Social Security Act and its Regulations is a complex matter. If you have a family member who has transferred assets to a family trust and that family member might shortly require rest home care, or are considering forming a family trust because of concerns over your future eligibility to a rest home subsidy, we would encourage you to contact our office to discuss.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Tim Rankin timrankin@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers (03 348 8480)

*Bridgford vs Chief Executive of the Ministry of Social Development [2013] NZCA 410.