Section 5(2A) of the Charities Act 2005 states that “the promotion of amateur sport may be a charitable purpose if it is the means by which a charitable purpose referred to in subsection (1) is pursued”. So, what sports actually meet these criteria for a charitable purpose?

The purpose of section 5(2A) is to ensure that the promotion of a sport can be a charitable purpose. While promoting a sport is not in itself a charitable purpose, the purpose of a charity could include the promotion of a particular sport for the purposes of promoting health or for the advancement of education, as is established in the section.

Recently, after six years of Swimming NZ being a registered charity, the Charities Registration Board decided to de-register it. The reasoning behind this was that it no longer had charitable purposes due to the competitive and elite nature of the high performance programme. This in itself does not promote a sport but instead promotes sporting success which does not benefit the public. They decided that while there was some promotion to health, the focus on promoting success in the sport outweighed this.

The impact of this decision by the Charities Registration Board is that sporting organisations set up as charities will need to prove that they are existing to promote health as opposed to promoting success in the sport, and ultimately be benefiting the public.

An article which discusses this in more detail was posted by the New Zealand Law Society and can be found here.

So, to answer the question above, any sport can meet the criteria for a charitable purpose as long as it relates to the promotion of health, the advancement of education or anything else that proves to be beneficial to the community, and it will need to be able to prove that it does continue to promote these.

The Charities Services website provides a helpful overview on this topic which can be found and here.

We offer legal advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

Trustee Duties

The Trustees have certain duties and liabilities placed on them under the relevant Trust Deed, New Zealand Legislation and Common Law (decisions of the Courts in New Zealand and Overseas). These duties include:

knowing the trust deed, the trust assets and liabilities;
advancing charitable purposes;
fiduciary duties of honesty and loyalty and acting in the best interests of the trust;
exercising care, skill and prudent diligence;
acting impartially amongst beneficiaries’
selling wasting property;
exercising reasonable care;
insuring assets and keep property safe;
keeping inventories;
investing within a reasonable time;
repairing trust property;
investing prudently;
not delegating;
acting jointly where there is more than one trustee;
not profiting from trust property;
being accountable; and
being honest, loyal, diligent and prudent in carrying out the terms of the trust.

If you would like further explanation of any of these duties, please get in touch with us.

Generally, a charitable trust will have between 3 to 7 trustees. Usually, trustees are a mix of professional executives and non-executives. They will be held to the same standard of care in their actions as applies to directors of a business (there is not a lower standard due to it being a charitable trust).

Trustee Liability

Trustees are representatives of the Trust. As noted above when discussing duties, they act as fiduciaries who hold the trust property for the benefit of the charitable purpose set out in the deed. It is important that trustees clearly understand what those purposes are and do not overreach and act in a way that is further than what was set out in the deed. If trustees fail to perform their duties then they may be subject to proceedings taken out by interested persons. Ultimately, the New Zealand Attorney General has certain rights as the ultimate power ensuring accountability. It is common for trust deeds to include some limits on trustee liability. However, as mentioned before it is possible that trustees will be jointly and severally liable where a trust fails to account for GST, ACC levies or PAYE payments.

This article is the second in a series on charitable trusts. To have a look at our first article which sets out the advantages and disadvantages of charitable trusts, click here.

The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.

Requirements for a Charitable Trust

At the very least, a charitable trust must:

– have a charitable purpose;
– have trustees to administer the trust;
– have a registered address in New Zealand;
– be internally managed by a trust deed;
– keep a record of trustee meetings through minutes and resolutions; and
– keep proper financial records.

Annual returns and Auditing

A charitable trust will be required to submit annual returns that vary in requirements depending on the tier of charity. This varies as follows:

– Tier 1: Over $30 million expenditure;
– Tier 2: Under $30 million expenditure;
– Tier 3: Under $2 million annual expenses; or
– Tier 4: Under $125,000 annual operating expenses.

Regarding the auditing of accounts, if the total operating expenditure for the last two accounting periods was:

– over $500,000 – financial statements must be either audited or reviewed by a qualified auditor; or
– over $1 million – financial statements must be audited by a qualified auditor.

Charities Services

After your trust board is incorporated, you may apply to Charities Services to register as a charity. Once you are registered with Charities Services you will engage with them in relation to ongoing compliance requirements such as annual reports and notifying changes. The following areas need to be updated if there are changes:

– the name of the charity;
– a change in the officers;
– the rules;
– the address for service;
– the purposes of the charity; and
– the balance date.

These changes can be made online rather than by filing paper forms.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

What is a Charitable Trust?

In New Zealand a common form that a charity will take is a charitable trust. These are used where there is not a “profit” motive for private gain for an individual from the activities of the trust. The regulator is both Charities Services (which registers charities if they meet legal criteria under the Charities Act 2005) and the Registrar of Incorporated Societies (which approves the incorporation of the trust boards under the Charitable Trusts Act 1957).

A registered charitable trust has the following key features:

– it is a separate legal entity;
– the liability of trustees is limited if the trust board has been incorporated;
– there is some cost involved in establishing the trust as certain documents are required but there is no cost to registering it; and
– there are ongoing reporting and administrative requirements.

Some Advantages

1. Separate Legal Entity

A charitable trust board which has been incorporated is a separate legal entity which can contract with others. A settlor (sometimes called donor) is needed to provide the initial amount which is how the trust is created (this is often a nominal figure such as $10).

2. Limited Liability

The liability of trustees is limited if the trust board has been incorporated. It is also common for a trust to provide indemnities for its trustees and officers and to take out insurance. Note, however, that trustees will be personally jointly and severably liable for certain taxes (GST, ACC levies, PAYE).

3. National Registration

New Zealand does not have a state-based system like Australia, so when a charitable trust has been registered by Charities Services that is a national registration.

4. Purposes are Restrictive

A charity in New Zealand must act to further its purposes which are set out in a trust deed. To be accepted as a registered charity those purposes must be charitable as defined in New Zealand law (which includes advancing religion). The charity cannot distribute funds or assets for the private gain of any individuals.

5. Powers of Trustees

Trustees can have a wide range of powers depending on how they are written in the Trust Deed. They can include matters such as use of funds, purchasing property, accepting money and carrying on a business.

Some Disadvantages

1. Establishment Costs

A charitable trust has some costs involved to set it up (usually more than $2,000.00 NZD). A lawyer will likely be involved to make sure that the purposes are charitable according to New Zealand law. They can also provide ongoing advice on the trust’s ongoing regulatory and filing requirements.

2. Disclosure and Reporting Requirements

A registered charity will have reporting requirements which can vary depending on their size (there are four tiers). There are financial reporting and auditing obligations on registered charities.

The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.

1. Govern don’t manage: Avoid getting into too much of the detail of how the trust operates. You shouldn’t be talking about minor issues at the Board level.
Yes! What is our strategic plan for the next 5 years?
No! Can we save $7 per month by purchasing paper in bulk?

Your rating out of 10?______

2. Have clear agendas: Don’t let meetings turn into a conversation that starts “what are we talking about again”? Have a clear defined standing agenda that then has key points added.
Yes! Circulate agenda in advance along with relevant pre-reading. Read it.
No! Show up late and try to remember what was discussed last time, with no agenda to guide the meeting (and ensure it finishes on time).

Your rating out of 10?______

3. Board Charters: This is a document that can provide overall guidance – set out role, relationships, how decisions made, procedures, inductions, committees.
Yes! Consider having a Board Charter and clearly set guidance out.
No! Continue without clear thinking and strategy behind what you are doing.

Your rating out of 10?______

4. Know your Trust purpose: It is surprising how many Trustees are unclear on the actual purpose and maybe have never even read the Trust Deed to see the original purposes.
Yes! Be clear on what the purpose is and let it guide decisions.
No! Put the Trust Deed in a drawer and not look at it for 10 years.

Your rating out of 10?______

5. Know the purpose behind the purpose: Think about and understand how the day to day and month to month work is of value – know your “why”. In many cases there are deep needs which are being met by each trust
Yes! Know your why (if you have not seen the Simon Sinek video, google it)
No! Don’t forget the real reason behind the activity and work being done.

Your rating out of 10?______

6. Plan ahead: Think long term not short term – discuss finances, properties, succession for your board, strategy, growth, is this Trust relevant …
Yes! In 5 years I think our landscape will have changed so here is what we need to do to prepare…
No! Where shall we hold our next meeting?

Your rating out of 10?______

7. Trust board size: I think optimum size is 4 to 6 Trustees. Many Trust Boards are more, but once you get above 8 the opportunity for participation drops. This results in a drop of enjoyment (less sense of contribution) and also reduces the quality of decision making because discussion is more limited.
Yes! Keep boards efficient by not growing them too large.
No! Don’t get too big – boards that have crept up above 10 are like a parliament and are also far more difficult to chair.

Your rating out of 10?______

8. Increasing need for professionalism as a Trustee: There is a growing need to create a culture of continuous improvement or learning within the Trusteeship itself. Have a view that you can never stop learning. Governance is a high calling.
Yes! Trustees ought to be encouraged to read material that takes them a bit further in their journey of understanding what it is to a Trustee and how to contribute.
No! Just wing it.

Your rating out of 10?______

9. Who should be on a Trust Board? In a small charity this may be a luxury but the ideal answer is someone who has both a strong belief in the vision and purpose of the Trust as well as a particular skill set that the Trust most needs.
Yes! Consider skill sets around tangible matters e.g. finances, property matters, operational issues but also the soft issues – the ability to think strategically, a high EQ and focus on building a great team.
No! Don’t focus on one set of skills instead aim for a diversity of thought.

Your rating out of 10?______

10. The right Chair? Good outcomes are largely the result of effective meetings and effective meetings are not possible if the Chair is not suited to the task. A good Chair creates an environment of respect, fair opportunity to speak, but without restricting candor and ensuring discussions do not go on any longer than necessary and a clear conclusion is reached. Also, if the organisation is large enough to have employed staff then the relationship between the Chair and the Chief Executive is a critical one.
Yes! Have those awkward conversations to ensure that the person most suitable to facilitate good meetings is the Chair.
No! Like all of these points, don’t continue on if change is needed.

Your rating out of 10?______

Some resources:

Simon Sinek, “The Power of Why” – YouTube Video

“Joan Garry’s Guide to Non-profit Leadership (because non-profits are messy)”.

“Good to Great and the Social Sectors” – Jim Collins (speaker on commercial/corporate leadership, but has good things to say for charity leadership as well).

“Boards that Lead” – Charan, Carey and Useem.

In terms of podcasts there a number of great leaders who speak to the leadership area including Andy Stanley and Carey Nieuwhof.

Seeds is a podcast I have been doing each Tuesday interviewing people for an hour on what they do and why – often this includes people who have started or run charities www.seeds.libsyn.com

Should you need any assistance with these, or with any other Trust and Asset matters, please contact Steven Moe at stevenmoe@parryfield.com (+64 3 348 8480).

Social enterprises have become a trending term in the business world over the last year, as proven by the more than 1,600 delegates attending the Social Enterprise World Forum in Christchurch last year. But what are some of the concerns with the legalities of social enterprises? And what actually is a social enterprise, anyway?

What is a social enterprise?

To start with, we need to get the definition right. In New Zealand the Ākina Foundation works in the social enterprise sector and its definition is a good one: Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact.

The key word there is purpose. Traditional business has had more of a focus on profit than purpose. In fact, that focus on profit is baked into our business model. For example, how important the shareholders of a company are and the focus on the directors returning profit to them.

Social enterprise flips that around and places the primary importance on purpose over profit. While these are businesses which are trading and they need a profit to continue, there is often some other reason for their existence beyond the money factor. In the past we might have relegated this ‘do-good’ approach to the realm of charities and not-for-profits. Social enterprises bring purpose front and centre and, perhaps most critically, provide a self-sustaining model for achieving good in society. Think about it – how are charities and not-for-profits operated? Often they are dependent on grants or funding streams, which may dry up over time and as the political climate or giving habits of donors shift. Social enterprises are longer-term solutions that often address real needs in a practical way. They seek to combine the heart of charity with the profit-making mindset of business.

Other factors making social enterprises different

This all may be intriguing, but what are some of the additional elements that set social enterprises apart?

1. Purpose: This should be clearly defined and set out

2. Profit distribution: A percentage should be reinvested into the purpose (how much is a point of debate)

3. Asset lock: May provide for the distribution of assets on wind-up to another similar entity acting for a comparable purpose, and

4. Reporting: Transparency and clear communication of how the purpose is being fulfilled and its tangible impact.

In New Zealand, there is no bespoke form of legal entity for social enterprises. If an entity has most of the elements above then it may start calling itself a social enterprise. In other words, there is no box to be ticked on a form or a particular legal structure that signals to the world that intention. This is in contrast to countries such as the United Kingdom, Canada and the United States that have adopted legal structures better suited to social enterprises.

Legal forms of social enterprises

Often a social enterprise will end up being a limited liability company. Some may choose to become charitable entities, either as charitable trusts or companies. There is a tension here, of course, because a charitable entity cannot return profits to investors. That means they are not the best option to raise money (investors seek a market rate return). In contrast, while a company may attract investors, it can be difficult explaining that the business has more than just profit in mind.

A good argument can be made that we need some new legal form that sits in the middle between a charity and a profit-making entity and embraces the best of both those structures. Such a ‘social enterprise company’ would certainly raise the profile of the sector and provide a means to empower those individuals who want to combine purpose and profit.

How might all this affect traditional business?

By now, you will recognise that the intention behind social enterprises is not new – people have acted in ways that go beyond profit for years. Often the outlet has been through charities (think op shops) so, in some ways, ‘social enterprise’ is just a fresh term and new way of expressing older concepts. What is clear is that it aligns with the next generation seeking purpose in their work. Often job interviews are not ending with questions such as, “Will I get a company car”, but instead, “How will my role contribute to society?”

Traditional business can learn from the approach of social enterprises and even be involved in supporting them in different ways, such as:

Social procurement: Consider how goods and services are secured. For example, at the next board retreat have lunches from a social enterprise catering company?
Purpose and vision: Whatever your business, it can be helpful to write down your purpose and vision. Get your ‘why do we do this?’ right as that can also help motivate staff, and
Impact: What is the footprint of your business? Who are your suppliers? Who do you employ? Is your corporate social responsibility policy gathering dust in a drawer?

Social enterprises are a growing force, but they will only have true impact if they can scale. To do that, they need traditional companies to better understand what they are and support them too.

Challenges ahead for social enterprises

Some of the challenges have been hinted at already such as gaining access to funding and finding buyers for the products made, or the services offered.

At the upcoming conference at Te Papa in April, Perspectives on Charity Law, Accounting and Regulation in New Zealand, there will be a session about social enterprises and where they fit in the not-for-profit world. Many charities are actively exploring what it might look like for them to start a social enterprise to diversify their income streams. Increasing education and awareness about the role social enterprises can play remains a challenge for the sector.

Another more subtle challenge is when businesses adopt the term ‘social enterprise’ as a way to entice consumers to buy what they are offering. This could result in the entire sector being discredited and dilute the true value of what the term stands for.

Looking ahead

This is more than a passing trend. The social enterprise sector is growing and it provides an alternative way of thinking about doing business. Whether or not you choose to be involved in starting a social enterprise or working for one, the principles that sit behind them have broader application to all businesses that are looking to have a positive impact on the world.

This article originally appeared on Idealog.

What are your options when a charity “runs out of steam” but you don’t want to give up on it altogether? What if you want some time to have a break from the charity and its compliance obligations, but intend to come back to it in a few years? We were recently asked the question of whether it is possible for a charity to “pause” for a period of time, and here is what we said:

Can you “pause” a charity?

Generally, a charity is deregistered (removed from the Charities Register) where it ceases all activity. This means that in order for a trust to remain “alive”, it must continue to be active. Pausing a charity essentially means that all activity for the charity will cease for a period of time and it is therefore no longer active. If a charity has been de-registered and wishes to get back on the Charities Register, it will need to go through the application process again.

There is, however, an exception to this – it is possible for a charity to continue to file annual returns for the years that it is “paused” which essentially holds the charity accountable to the fact that it has paused. So long as the charity is not making any returns, it would not need to pay anything on filing those annual returns.

Conclusion

In conclusion, it is possible that you could pause a charity and come back to it in a couple of years, provided that you continue to file an annual return each year for the years where the charity is paused. This option could be advisable where you do not want your charity to be deregistered and to have to go through the application process again at a later date.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

We get many questions from start-ups, charities and social enterprises on what they need to consider when establishing themselves. This made us think – “why not put all our answers in one spot?!”

After the initial buzz of coming up with your great idea, the next practical stage can be quite overwhelming – particularly if this is your first time engaged in a start-up. This toolkit seeks to guide you through the process, informing you on different structures, key contracts, and highlighting the topics people often forget about.

The book covers a range of topics including:

how to set up a company;
specific guidance on social enterprise and not for profits;
fundraising;
liability and ongoing duties;
employment issues; and
includes a template of a non-disclosure agreement.

With the success last year of “Social Enterprises in New Zealand: A Legal Handbook,” we are excited to see the impact this book will have.

To get the ebook, click here.

The book launch, which includes a bit of a busking theme by Kris Morrison and Steven Moe can be viewed here

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

State Integrated Schools are a kind of school recognised by New Zealand’s education system, but their structure can be confusing to understand.

What are State Integrated Schools?

New Zealand’s education system allows for a range of different types of schools. The four main categories are State Schools, State Integrated Schools, Charter Schools and Private Schools.

State Integrated Schools are a kind of special character school that allows for collaboration between the government and a private proprietor in a way that preserves the special character of the proprietor and the school.

Every state integrated school has an integration agreement between its Proprietor and the government which sets out various details about the intended operation of the school, and includes a description of the particular or general religious or philosophical beliefs that provide the framework for the education at the school.

Types of Special Character Schools that have been established in New Zealand include Catholic, Anglican, Methodist, Presbyterian, Adventist, Jewish, Muslim, Steiner, Montessori and non-denominational Christian schools.

Often the parents of children at a state integrated school struggle to understand who is responsible for leading and operating a state integrated school. It can be confusing when information and invoices relating to the school come from a variety of different sources.

Who governs State Integrated Schools?

The governance structure for Integrated schools can be confusing because they have more than one person or body with decision making power. The main decision makers are:

The Board of Trustees

Each state school (including state integrated schools) has a Board of Trustees, which is a body corporate incorporated under the Education Act 1989, and is a Crown entity under the Crown Entities Act 2004.

The Board of Trustees is the governing body of its school, and is responsible for the governance of the school, including setting the policies by which the school is to be controlled and managed. Its primary objective in governing the school is to ensure that every student at the school is able to attain his or her highest possible standard in educational achievement.

The Board of Trustees is required under the Education Act 1989 to ensure that the school is a physically and emotionally safe place for all students and staff; and is inclusive of and caters for students with differing needs. It must have particular regard to any statement of National Education and Learning Priorities, and must comply with specified obligations in the Education Act 1989 relating to curriculum statements and national performance measures, teaching and learning programmes, and monitoring of student performance. if the school is a member of a community of learning that has a community of learning agreement, it must comply with its obligations under that agreement.

The Board of Trustees is made up of the principal, several parent elected representatives, a staff representative, a student representative. In the case of state integrated schools, the Proprietor of the school has the right to appoint a number of trustees to sit on the Board of Trustees along with the other trustees.

The Board of Trustees of a state integrated school operates in mostly the same manner as the Board of Trustees of any other state school, but must operate in a manner that reflects the special character of the school, and must consult with the Proprietor on various matters.

The Principal

The school’s principal is the chief executive of the Board of Trustees in relation to the school’s control and management.

The Principal must comply with the law of New Zealand and the Board of Trustees’ general policy directions, but otherwise has complete discretion to manage as the principal thinks fit the school’s day-to-day administration.

The Principal of a state integrated school operates in mostly the same manner as the Principal of any other state school, but must manage the school in a manner that reflects the special character of the school and, if the school has a religious special character, may be required to have willingness and an ability to take part in religious instruction appropriate to that school .

The Proprietor

The school’s Proprietor owns or leases the land and buildings used by the school and is responsible for any loans or funding in relation to the land and buildings. The Proprietor must plan for and ensure that the buildings and facilities are brought up to at least the minimum standard specified by the Secretary of Education for state schools.

The Proprietor has the right and the responsibility to supervise the maintenance and preservation of the education with a special character provided by the school and to determine what is necessary to preserve and safeguard that special character.

If the Proprietor believes that the special character of school has been or is likely to be jeopardised it can exercise various powers under the Education Act, including a power to cancel the integration agreement with the government (but it must consult with the government before doing so).

The Board of Trustees and Principal must give the Proprietor access to the school at all reasonable times to ensure that the special character of the school is being maintained.

Who Owns State Integrated Schools?

The land and buildings of a state integrated school are owned and maintained by the Proprietor, which is often a charitable trust or Church or other religious organisation. The day to day operations of the school are funded by the government through the Ministry of Education. The government pays staff salaries and an operations grant for the running of the school, and gives some funding directly to the proprietor for maintenance and improvement of the buildings.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source. Contact Kris Morrison at krismorrison@parryfield.com to request this or for any other questions. Copyright © Parry Field Lawyers 2017.

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 Steven Moe at Parry Field Lawyers stevenmoe@parryfield.com or 03 348 8480

Trustee Duties

Trustee Liability

What is a Charitable Trust?

Some Advantages

Some Disadvantages

What are State Integrated Schools?

Who governs State Integrated Schools?

The Board of Trustees

The Principal

The Proprietor

Who Owns State Integrated Schools?

What is a Foreign Trust?

Historical Perspective

Current legal position

Taxation

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

Conclusion

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland