New Zealand: Regulation & Trust Reform

By John W Hart, Barrister, TEP, New Zealand (16/06/2015)

Companies/Partnerships – Resident Director Requirements

New Zealand has unfortunately had a few cases where unscrupulous individuals have misused New Zealand companies for illegal or inappropriate purposes.  There is a valid perception that one of the reasons this has occurred is that (until now) a New Zealand company did not require a New Zealand resident director, and therefore there is scope for foreign individuals who have no standing in the New Zealand jurisdiction to participate in these inappropriate activities.  Whilst not always the case, behaviour tends to be better when local officers are accountable. Consequently the law has been amended by the Companies Amendment Act 2014.

It will be a requirement for every New Zealand registered company to have:

·         a director who lives in New Zealand, or

·         a director who is also a director of a company formed in, and who also lives in, a country with which New Zealand has reciprocal enforcement arrangements (an ‘enforcement country’).

There is no indication which countries may be approved as ‘enforcement countries’ – at the present time Australia is the only country to be approved.  Corporate directors are not permitted.

The new rules came into force on 1 May 2015.  Existing companies will be able to rely on the 180 day lead time in the transitional provisions and will therefore have until 28 October 2015 to comply with the ‘resident director’ requirements.

Registration and Information Requirements

It is a requirement for directors to supply their date and place of birth information (and their residential address) at the time of registration of a company and on any change of their directorship. Typically, the Registrar will require certified copies of a passport and utility bill (or equivalent) – and in fact the Registrar is presently requiring this KYC on foreign directors and shareholders, relying on his general powers under the Companies Act 1993.

Only the residential address becomes a matter of public record.

It is also a requirement that details of a company’s ultimate holding company (if it has one) is disclosed at the time of registration and kept up to date. These details will be publically available.

Changes to the Limited Partnerships Act 2008

A corresponding series of changes have also been made to the Limited Partnerships Act, including:

·         General partner with a connection to New Zealand: There is a new requirement for a general partner to have a connection to New Zealand or an ‘enforcement country’ by requiring:

o    a general partner who is either a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or

o    a general partner that is a limited partnership with at least one general partner who is either a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or

o    a general partner that is an ordinary partnership governed by New Zealand law (ie, the Partnership Act 1908) that has at least one partner who is a natural person living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country; or

o    a general partner that is a New Zealand registered company; or

o    a general partner that is an overseas company registered under the Companies Act (i.e. as a branch) with at least one director living in New Zealand or who lives in an ‘enforcement country’ and is a director of a company that is registered in that country.

·         Identifying information for general partner: As with companies, additional information must be provided in applications to become a limited partnership, to assist with verifying the identity of the general partner.

·         Enhanced powers to identify control interests of a limited partnership: In sympathy with the changes to the Companies Act, the Registrar has also been given specific powers to identify the control interests of limited partnerships in order to comply with New Zealand’s FATF obligations.

These new rules are effective now for new and existing limited partnerships.  There was a six month period of grace (which ended 27 February 2015) for existing limited partnerships to make the changes to general partners. 

Trust Law Reform

The Law Commission released its final report on the reform of trust law in late 2013 (although it has yet to deliberate on charitable trusts and purpose trusts, and will be undertaking further work in relation to the use of corporate trustees). The government has expressed its support for the enactment of a new Trusts Act, although the time frame for that has yet to be determined. It is possible draft legislation may be promulgated for public submissions in 2016, although it may be that the government will defer this pending completion of the Law Commission’s remaining work in this area.

Trust Resettlements

For those involved in provision of services to New Zealand foreign trusts (ie, trusts which have exclusively non-New Zealand resident settlors, which are not liable to tax in New Zealand unless they generate New Zealand sourced income) one issue that rears its head from time to time is the possible tax consequences of a foreign trust being resettled onto a new New Zealand foreign trust.

From a tax policy point of view it is quite clear in the writer’s view that the settlor and settlement definitions are only intended to capture ‘real’ settlors, in this case being the offshore individuals involved in the establishment of both trusts.  There is no tax policy basis for bringing the second trust into the New Zealand tax regime simply because the first trust essentially functions as a conduit for assets from the original settlor to the second trust. However, the pre-2007 settlor/settlement definitions were sufficiently broad that there was a risk that, taken literally, the first trust might be deemed the settlor of the second trust (in tandem with the settlor of the first trust), and if the first trust had a New Zealand resident trustee with effective management here, then the first trust could be treated as the New Zealand resident settlor of the second trust. This could cause the second trust to be classified as a complying trust (ie onshore/fully taxable).

Whilst the 2007 re-draft of the legislation is, in most cases, not intended to change the law, there have been some significant changes in wording which were perhaps intended to clarify the legislative intent. 

Section HC 28(5) of the Income Tax Act 2007 (the Act) provides that the settlor of the first trust will be deemed to be a settlor of the second trust, which is consistent with the ‘scheme and purpose’ interpretation of the legislation.

Section HC 27(4) provides that:

“A person may make the transfer or provision in subsection (2) directly or indirectly, or by 1 transaction or a number of transactions, whether connected or otherwise.”

Section HC 27(2) provides that a settlement is a ‘transfer of value’ to a trust.

Reading HC 27(4) and HC 28(5) together, there is in the writer’s opinion a strong basis for asserting that one disregards the first trust altogether in terms of determining who the settlor of the second trust is:  one only looks at the original settlor.

At first sight there is a slight point of concern which arises from section HC 14(2) of the Act, which states in effect that there will be a ‘transfer of value’ from one trust to another (and therefore a ‘distribution’ in terms of section HC 14(1)) if the amount or the property being transferred between the two trusts is either beneficiary income or a taxable distribution.

Section HC 15(4) sets out the definition of ‘taxable distribution’ in respect of a foreign trust. A taxable distribution is anything other than the following:

                      Beneficiary income; or

                      A part of the corpus of the trust;

                      A profit from the realisation of a capital asset or another capital gain, with the exception of capital gains generated from transactions between the trustee and an associated person of the trustee.

The reference to a transfer of value between two trusts in section HC 14 is, however, not designed, in the writer’s opinion, to cause the first trust to be deemed a settlor of the second trust: it is merely designed to prevent tax advisors from uplifting the value of corpus in the second trust by receiving a large distribution from the first trust which, within the first trust, is a mix of corpus, capital gains and taxable reserves. In other words the section is intended to ensure the character of those reserves in the first trust is maintained in the second trust; otherwise one could assert that everything received by the second trust has the character of corpus.

Unfortunately, the only official pronouncement from the Inland Revenue Department (IRD) on this topic is a very aged Tax Information Bulletin article issued in November 1989 which takes a simplistic approach relying on the 1976 Act that, in the context of a resettlement, Trust A will be a settlor of Trust B, and this may have the consequence that Trust B is not a foreign trust.

The writer would suggest that it cannot have been the policy intent of the legislation to ‘convert’ a foreign trust to a complying or non-complying trust by the mere act of resettling trust assets from one trust to another.  It is much more appropriate to look through the head trust to the original natural person settlors. As trust resettlement is a common mechanism for varying the terms of a trust or rectifying deficiencies in the original trust, it seems unduly harsh that the tax status of the trust should be completely reversed merely through the action of resettlement.

As indicated above, the writer believes that the wording of the 2007 Act permits one to disregard the head trust as a settlor, but given the matter is not entirely without doubt it would be useful if either the legislation was amended, or IRD issued an interpretation statement, to clarify the point.

In the meantime, foreign trust clients may have to go through the convolution (out of caution) of changing to a non-New Zealand trustee before resettling upon a new New Zealand foreign trust; and/or winding up the head trust (which may not be feasible in some cases). This latter approach is driven off a statement in the TIB (paragraph 6.122) that:

“If the trust from which the settlement is made is wound up the trustees of that trust will cease to be settlors of the resettled trust because the trustees were settlors of the resettled trust in their capacity as trustees of the trust from which the settlement was made rather than in a personal capacity. If the original trust is wound up the trustees lose their status as trustees of that trust and, because their status as settlors of the resettled trust depends solely on their status as trustees of the original trust, it follows that they also lose their status as settlors of the resettled trust.”

It seems incredibly arbitrary that the sub-trust will be categorised as a foreign trust if it is feasible for the head trust to be wound up.  It would be much more sensible to follow the interpretation that one should focus on the ‘real’ settlors of the head trust.