Vulnerable Trusts

It seems like pretty much everyone has a trust these days; whether it be for asset protection or other reasons – the vast majority of them going unchallenged and untroubled even when they may not be maintained as diligently as the law of trusts intends.

The origin of trusts can be found in the eleventh century when English knights going to fight the holy wars left their manors and estates in the care of trusted friends for safekeeping while away on crusade. However, trusts are not just some old antique notion from far away England; they are a well-established feature of contemporary common law with a proven pedigree.

They endure today as an innovative element of modern legal systems around the world and while their prevalence in New Zealand has grown in recent times their relevance is without question.

However, since the Supreme Court handed down its judgment in the Clayton v Clayton matter, the validity and future of the New Zealand trust has been brought into question. The ramifications of the Clayton judgment go far beyond the matrimonial property issues upon which the litigation was originally based and an entire new dawn of trust-busting by creditors or insolvency practitioners could be on the horizon.

The logic is that if a trust’s property can be construed to form part of a beneficiary’s property for matrimonial purposes, then it should also form part of their property against which creditors could lay claim.

What we should not lose sight of is that trusts have been used for estate planning and asset protection for centuries and their utility and flexibility for these purposes have been proven over time.

The flexible character of trusts permits them to be utilised in the constantly-evolving global legal and financial environment, meaning new uses and adaptations of trusts are being developed perpetually to suit the needs of property holders worldwide.

The issue at hand is how trusts in New Zealand have moved away from the fundamental concept of placing the control of one’s assets into the hands of a trusted party, for the benefit of one’s dependants or other named beneficiary.

Today many New Zealand trusts have been established in such a manner as to allow the modern equivalent of the knight going to fight a crusade being able to retain control of the assets and to use them for their own gain; a notion that defeats the entire raison d’etre of the trust. Those knights of old had a pretty good prospect of not returning, hence the notion of the trusted friend looking after their loved ones, using their assets to do so.

It is that sort of trust that is at risk in light of the Clayton decision; one where the modern day knight simply helps themselves to the assets of the trust to suit their needs and in conflict with the notion of distancing the ownership and of the assets that are being held for the benefit of others.

Where a trust has been properly established and maintained this landmark decision should not pose any threat to the family trust. However, it has become common for the party who settles the trust to also be trustee and a beneficiary and in certain instances this can result in effectively total control.
There is a fine line between retaining too much power and giving away all rights to supervise the administration of the trust’s property.

The heart of the Clayton decision was retention of too much control by the settlor, leading the Court effectively to look through the trust and to decree that the settlor retained valuable rights in the trust’s property.

The simple solution is to ensure that the trust is properly constituted and maintained and that there is the correct balance between retention of a right of supervision but not having too much power.

If you have a trust it may be time for you to talk to us about our trust review product to ensure that you do not get caught out by the recent decision of the Supreme Court.

New Zealand Foreign Trust inquiry recommendations accepted

A great deal of media coverage has been devoted to the revelations from the “Panama Papers” and the spotlight has been drawn to New Zealand Foreign Trusts, resulting in a substantial review of the regime. As a result, the Government has acted decisively with some changes now imminent.

A New Zealand Foreign Trust is an entity which provides non-resident persons an opportunity to utilise the economic and political stability and trusted reputation of New Zealand as a base to manage their assets, without the imposition of New Zealand tax on non-New Zealand sourced income

The Government’s response to the independent review of New Zealand’s foreign trusts has accepted all of the recommendations to expand disclosure and reporting requirements (with some modifications).

The review also recommended expediting the application of Anti-Money Laundering (AML) rules to lawyers and accountants by removing the current reporting exemptions. The Government is supportive of the objective but has indicated that this can only be achieved via legislation, which it expects to pass in early 2017.

It is unsurprising the Government has acted decisively in light of the review’s objective assessment of New Zealand’s current regime and its deficiencies. This will help ensure that New Zealand’s reputation as a responsible global citizen is maintained.

What is the Government proposing for NZ foreign trusts?

The review’s detailed recommendations included:

• More detailed disclosure (e.g. about the settlors, beneficiaries, trustees and any persons effectively exercising control) on establishment of a NZ foreign trust
• Annual returns including financial statements to be provided to Inland Revenue
• Removing the tax exemption on foreign source income if a NZ foreign trust has not complied with the disclosure obligations
• A register of foreign trusts, which is searchable by Government agencies.
• A registration and annual fee of $500 to cover administration costs of the new regime.
• Early extension of AML laws to lawyers and accountants via Government regulation (such that AML due diligence and reporting requirements will apply when they establish/administer NZ foreign trusts).
• Providing more and better guidance on how AML requirements apply to trusts, in particular around verifying beneficial ownership and settlors’ sources of wealth or funds.

The Government has accepted all of the review’s recommendations, with the following specific modifications:

• The annual return information requirements have been increased to include details of settlements on the trust and the identity and tax details of the settlors. The annual return will need to be filed within 3 months of the trust’s balance date.
• The register of NZ foreign trusts will be maintained by Inland Revenue, but with the right to search to be restricted, at least initially, to the Department of Internal Affairs and the Police.
• The tax exemption on foreign sourced income will still be available if non-registration or lack of disclosure was unintentional and is remedied immediately.
• A grace period of 2 years is proposed before a new migrant who is a trustee of a NZ foreign trust (but is not in the business of providing trustee services) needs to register or file returns.
• Extension of AML requirements to lawyers and accountants will be via legislation (not Government regulation) due to legal privilege and supervision issues needing to be addressed.
• The registration fee will be $270 with an annual filing fee of $50.

The Government has introduced draft legislation to implement the new tax disclosure and reporting requirements. The suggestion is that the new disclosure rules will apply to new NZ foreign trusts from date of enactment, with a transitional period to 30 June 2017 for existing NZ foreign trusts to comply. The annual return requirement will commence for income years beginning on or after 1 April 2017.

The AML extension to lawyers and accountants (and potentially real estate agents) is expected to be legislated in the first half of 2017. At the same time, changes to regulations and supervisory guidance to address the other AML recommendations could necessitate changes to reporting entities’ AML programmes.

Crowdfunding: A Few Ideas on a New Innovation

The phenomenon of crowdfunding has become a part of our business landscape and while not yet a wholly popular and widely accepted method of raising capital, it is happening with growing regularity.

In its simplest of forms it involves taking a product or investment opportunity, that has general appeal but that needs capital, out to the wider community in search of capital contributions. The idea is pitched to people who would not normally make investments in new or innovative ideas but who find the notion worthy of support and they make a contribution to the appeal, suited to their budget. Sometimes the contribution is very small and in many instances the return on the investment is altruistic rather than economic, with the investors not getting any money back but rather just enjoying the recognition of being able to have helped.

Either way, it has become a legitimate source of funding for innovation and the increased mobility of private capital creates a new means of raising money for bigger and bolder ventures, such as property developments.

When faced with a crowdfunding opportunity one should not simply discard it, as it may represent a viable opportunity to invest in something without having to commit too much money and yet it can result in a reasonable return on investment.

However, one must always apply the principle of a direct correlation between risk and return in this type of investment. The creditworthiness of the borrower and the viability of the overall project must be assessed when pricing the peer-to-peer advance or investment; obviously the higher the assessed risk, the greater the required return is likely to be.

One should always consider why a peer-to-peer funding arrangement would be required as opposed to simply seeking finance from more traditional sources such as a bank.

Pooling mechanisms amongst peer-to-peer lenders in respect of property developments are becoming popular in Australia and it is just a matter of time before the concept catches on here too. Funds accrue in a special purpose vehicle (SPV) and when there are sufficient funds available then the SPV will lend on a suitable project.

This is akin to syndicated property investments but when committing one’s money to the SV one is removing the investor’s discretion around the nature of the project and to whom the funds are to be lent. Also, such an arrangement eliminates the instantaneous element of peer-to-peer lending that may be a particular attraction and reason for making such an investment. However, it could create a great opportunity to invest in property developments without having to break the investment budget.

While peer-to-peer lending will continue to grow and become a more popular form of investing in projects, the key rules of investment remain valid and you should always seek professional advice around any such opportunities presented to you.

Cyber Security

Cyber attacks and data leakage are daily threats to organizations globally, reminding us that we are all potential targets of this type of threat. Given this environment, it is not surprising that cyber risk is now near the top of priorities for businesses, or at least it should be.

In New Zealand a substantial number of businesses now have an online presence and as a result, are experiencing a range of benefits. Another effect of moving more into online spaces is that businesses are becoming increasingly aware of the significance and necessity of cyber security thanks to heightened interest in the subject. This highlights the increasing appreciation amongst business owners of the importance of good cyber security processes and working with trusted partners to make sure their data is secure. A general awareness of the damage that breaches can inflict on a business’s operations and reputation is a critical part of doing business online.

Potential impacts and possible implications for businesses include:

• Intellectual property losses including patented information and trademarked material, client lists, and commercially sensitive data;
• Legal expenses including damages for data privacy breaches/compensation for delays, regulatory fines and the cost associated with defence;
• Property losses of stock or information leading to delays or failure to deliver;
• Reputational loss which may lead to a decline in market value, and loss of goodwill and confidence by customers and suppliers;
• Time lost and distraction to the business due to investigating how the breach occurred and what information (if any) was lost, keeping stakeholders advised and explaining what occurred to regulatory authorities; and
• Administrative cost to correct the impact such as restoring client confidence, communications to authorities, replacing property, and restoring the organization’s business to its previous levels.

The use of online cloud services is one way that businesses, especially SMEs, can improve information security. Cloud based services will, in general, offer better information security programmes than what SMEs can manage on their own.

Other important actions that all business should take include having up-to-date, high quality security software and apply all security patches and updates from the provider. Also, don’t use simple or obvious passwords, use different passwords for your email, banking and system access, and be on the lookout for fake emails that look like they come from trusted sources trying to get you to click on links or download attachments.

The Difference Between Bookkeepers And Accountants

Bookkeeping and accounting are necessary for all businesses, regardless of their size. Unfortunately many small businesses can’t afford to have a full or part time accountant or bookkeeper in house to maintain their books regularly. It is now becoming much more practical for small businesses to outsource their day-to-day bookkeeping duties as well as their accounting services. It is important for businesses to recognise the value that bookkeepers and accountants provide to their business, and while they share a common overall goal, bookkeepers and accountants serve to maintain different areas of a business’s financial health.

There are three main areas of the accounting process – transaction processing, compliance and advisory. Accountants are responsible for compliance and advisory work, while bookkeepers are responsible for transaction processing and improving the transaction processing aspects of your business. Without correct and accurate transaction processing, you may find your accountant struggling to provide you with correct compliance work. This can be costly both in accounting fees to fix errors and in penalties imposed for inaccurate information filed with IRD. It is therefore important that not only are your books maintained accurately, but that your bookkeeper and accountant work together well to ensure the overall health of your business’s finances.

The Role Of A Bookkeeper

A bookkeeper is in charge of recording day-to-day business transactions. This can include working with your accounting package (i.e. Xero, MYOB) to:

• Reconcile your bank account
• Enter the bills you need to pay
• Record Sales
• Payroll
• Daily Cash flow
• GST
• PAYE
• Monthly reporting
• Take all your receipts, invoices and other transaction details and recording the information in accounting software using proper accounting methods.

Your bookkeeper works with you to make sense of the numbers, for example assigning costs to specific clients.

The Benefits Of A Bookkeeper

Business owners tend to be in more constant contact with their bookkeeper, as opposed to their accountant, as bookkeepers do their work consistently throughout the year. Accounting is done at the “end of the financial year” and advisory is done ad-hoc throughout the year or at a review period after your accounts have been completed. Depending on the size of your business, your bookkeeper may well do a little bit every day on your accounts.

Furthermore, bookkeepers tend to be very aware of the time saving and process improving apps and add-ons that are continually changing in the market. This can benefit your business by giving you direct and up-to-date access to the best processes available.

The Role Of An Accountant

An accountant makes sense of financial information and produces financial reports and suggestions based on that information. This includes:

• Preparing year-end financial accounts
• Completing income tax returns
• Analysing costs of operations
• Completing financial forecasts
• Adjusting entries
• Advising on large business and personal transactions
• Risk assessment for your business.

The Benefits Of An Accountant

Tax regulations change regularly. Accountants stay up-to-date with these changes and can advise you on how they affect your business and how they can benefit you financially. A good accountant will help you utilise these changes to legally minimise your tax bill. Compliance and advisory that accountants engage in is specialist work that carries serious penalties and risk to your business if not done correctly.

Your accountant can also be a great source of advice and act as a sounding board to aid your businesses growth. For your business to be a success, it’s important that you make the right financial decisions early on, and an accountant can help you make decisions that will benefit you in the long run.

Ecovis KGA is in the process of launching a dedicated bookkeeping service as a means of assisting clients to prepare monthly accounts and complete GST returns at an affordable cost. If you are interested in this service please speak to us and we can let you know more about it.

To pay or not to pay - Construction Contracts Act

This article is attributed in full to Steve Dukeson, Dukesons Business Law, and can be viewed here.

Say there is a building contract. The builder will present the client with a payment claim. It will set out what the builder claims as payment for work done and must contain the information required by the Act. The client has 20 working days to pay the claim or, if they dispute the amount claimed, to provide a payments schedule. The client’s payment schedule must set out what amount they consider to be payable and any other information required by the Act. If the client issues a payment schedule, then the client can have the dispute referred to adjudication (like arbitration).

It the client doesn’t pay and doesn’t provide a payment schedule within the prescribed time, the builder can recover the amount claimed as a debt – in those circumstances, the Act requires the client to pay the whole amount claimed by the builder. Amongst other things, that means that where the client is a company, the builder can serve a statutory demand on the company as a precursor to making an application to have the company liquidated.

If the builder serves a statutory demand and later applies to liquidate the client company, the company can’t argue set offs and counter claims (though the company could still raise some matters that go to the very core of the matter like an argument that the builder didn’t issue a valid payment claim). So “playing the game” by the rules is crucial.

I have had clients even with some experience in relation to construction contracts pay the price for not complying with the payment regime set out in the Act. The purpose of the payment regime is to provide a quick and simple payment mechanism, enabling any disputes to be identified early. A client who fails to follow the correct procedure may have to pay and separately, issue proceedings to recover any over payment due to a valid grievance that they have.

Points to Note

Entertainment expenditure – gifts of food and drink

The entertainment expenditure rules in subpart DD of the Income Tax Act 2007 limit tax deductions for certain types of expenditure to half the deduction normally available.

One type of expenditure covered (with exemptions) is expenditure on providing food and drink off business premises. This means that spending on things like chocolates or a bottle of wine to give as gifts to customers, clients or suppliers for example, will not be fully deductible.

If the items are purchased as a gift basket or together with other items that aren’t food and drink, the expense must be apportioned between fully deductible and not fully deductible.

Fringe benefit tax and work related vehicles

If you make a vehicle available to an employee, their associated persons or shareholder-employees for private use, you will need to pay fringe benefit tax (FBT) whether the vehicle is used or not.

Fringe benefit tax (FBT) doesn’t apply on days where a motor vehicle qualifies to be a work-related vehicle. To qualify, all of the following conditions must be met:

• the principal design of the vehicle isn’t for carrying passengers;
• the exterior of the vehicle permanently and prominently displays business signage;
• employees are notified in writing that the vehicle is available only for travel between home and work and travel incidental to business, eg, passing by the bank on your way home from work; and
• regular checks are carried out and recorded to make sure employees are following vehicle restrictions.

FBT is payable for any day the motor vehicle doesn’t meet the four conditions.

Some examples where FBT is payable on work-related vehicles (eg, utes, double cab utes or vans) is a vehicle:

• which doesn’t have permanent sign-writing;
• made available to use privately over the weekend;
• that has no restrictions in place about using it privately;
• where the employer has notified the employee(s) in writing of any private use restrictions, but doesn’t make regular checks on restriction compliance; or
• where regular checks on restriction compliance are undertaken by the employer and private use that has taken place is identified.

Click here for the IRD Fringe Benefit Tax Guide or talk to us if you have questions about your FBT obligations.

Non-resident businesses and GST

From 1 October 2016, non-resident businesses that supply remote services (including online services) to New Zealand resident customers, and who meet the registration criteria to charge and return GST on those supplies.

These customers are able to register and enrol for GST now in order to prepare for the 1 October 2016 law change.

For more information on non-resident business and GST click here.