Private Wealth 2020

Last Updated August 12, 2020

New Zealand

Law and Practice

Authors



Cone Marshall Limited is a leading global and independent advisory and fiduciary services firm comprised of lawyers, trust officers, wealth planners and accountants. It specialises in trusts, wealth and asset management, succession planning, tax planning and fiduciary services. The firm advises on how to securely and efficiently structure wealth and plan for its succession to future generations, and it aims to meet clients' needs, whether domestic or international, individual, family or business. The team has special skills in resolving conflicts of law across multiple legal systems. Formed in New Zealand in 1998, Cone Marshall has expanded into a global group, which now administers trusts and related entities across multiple jurisdictions, with offices in the USA (New York, Wyoming and Florida), Hong Kong, Montevideo, São Paulo, Geneva, Lugano, London, Milan, Athens and Tortola, British Virgin Islands.

New Zealand’s tax system does not include the following:

  • inheritance tax/estate tax;
  • wealth tax;
  • gift duty;
  • stamp duty;
  • social security tax;
  • capital gains tax (with some limited exceptions); and
  • local or state taxes (apart from property rates levied by some local councils and authorities).

Individual Tax

An individual New Zealand tax resident (NZTR) is subject to New Zealand income tax on worldwide income and New Zealand-sourced income. 

All personal income tax rates were reduced as of 1 October 2010:  

  • up to NZD14,000 per year – 10.5%;
  • from NZD14,001 to NZD48,000 – 17.5%;
  • from NZD48,001 to NZD70,000 – 30%; and
  • NZD70,001 and over – 33%.

An individual’s income includes the following sources:

  • business;
  • partnership;
  • employment;
  • interest;
  • dividends;
  • government pension; 
  • annuities;
  • beneficiary income under a trust; and
  • royalties.

Non-residents (individuals and entities) are taxed on New Zealand-sourced income including interest, dividends and royalties.

Trust Tax Regime

A complying trust is a domestic trust that has been established by a New Zealand resident settlor. It is taxed at a rate of 33% on worldwide and New Zealand-sourced income.

A foreign trust is established by a non-resident settlor and has a New Zealand resident trustee. A foreign trust is exempt from New Zealand income tax on worldwide income and is only taxed on New Zealand-sourced income at a rate of 33%. 

Foreign trusts are unique in that they can be used as offshore vehicles by non-residents as part of their estate and wealth planning. Provided none of the assets of the trust are New Zealand-situs assets, then in most cases the income derived from the holding of those assets can be distributed to non-resident beneficiaries, without any liability to tax arising in New Zealand.

A non-complying trust occurs when the non-resident settlor of a foreign trust becomes a New Zealand tax resident. Distributions of capital gains and income from a non-complying trust are taxed as beneficiary income or taxable distributions at a rate of 45%.

A person becomes tax resident from the date:

  • they cease being a transitional resident; or
  • their first day of residence in New Zealand.

The settlor should make an election (for the non-complying trust to become a complying trust) within 12 months of becoming tax resident to prevent punitive tax rates from applying to distributions.

Company and Limited Partnership Regime

The worldwide and New Zealand-sourced income of a company is taxed at 28%. 

A limited partnership is transparent for tax purposes. In determining its income tax liability, the general partner may attribute the partnership’s income, expenses, tax credits, rebates, gains and losses to the underlying partners in proportion to their partnership interests.

The partnership can be a useful offshore vehicle for a non-resident. 

Transitional Residence Rule

The transitional resident exemption enables persons who become resident in New Zealand to receive most of their worldwide income tax-free for 48 months from the date they become tax resident. 

This exemption is also available to New Zealand residents who have been absent from New Zealand for ten years or more.

Traditionally, tax policy in New Zealand has been stable and consistent over recent decades and this is expected to continue. 

A Tax Working Group was established by the New Zealand government in late 2017 to review the current taxation system. The mandate of the Working Group was to provide an opportunity for the government and country to review the fairness of the tax system and debate options for change.

The government has responded to the recommendations proposed by the Working Group. It has stated that it will not be introducing a capital gains tax, wealth tax or land tax. Furthermore, the government has no policy or intention to change the rates of tax to which businesses are subject. Instead, it is considering reducing the tax-compliance costs businesses face by looking at the options and adjustments proposed by the Working Group. The government has also stated that work is already underway on various taxation instruments that tax businesses that have a negative environmental impact, in order to reduce greenhouse gases, address water pollution and abstraction issues, as well as solid waste disposal. At the same time, the government acknowledges that more work needs to be done on environment tax policy. 

The government has stated there is no foreseeable need to change the tax system for fiscal reasons. The absence of a wealth tax and most capital taxes makes New Zealand an attractive and stable place to live and invest.

On 30 July 2019, New Zealand enacted the Trusts Act 2019. It comes into force on 30 January 2021 to replace the Trustees Act 1956 (TA) with a modern, coherent and useful statute which takes the most fundamental trust law principles from the common law and puts them into accessible legislation for all to understand. The Trusts Act 2019 does not codify all trust law but recognises the complexity, nuances and desire for continued development through case law. These reforms will enhance New Zealand’s reputation as a trust jurisdiction for both local and international practitioners.   

Measures Introduced in Response to COVID-19

On 30 April 2020, the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act was unanimously passed by the New Zealand Parliament. This Act introduces several temporary measures that are intended to provide financial support to businesses and individuals through the tax system and the Commissioner of Inland Revenue and is expected to provide more than NZD3 billion in tax relief.

The Act introduces a temporary loss carry-back scheme. Under this scheme, a tax payer expecting to make a loss in either the 2019–2020 or 2020–2021 tax year can estimate that loss and offset it against a profit made in a previous tax year, which may result in a refund of taxes paid in the immediately preceding tax year. The terms of the loss carry-back scheme are applicable to companies, trusts, and certain individuals. 

The Inland Revenue Department (IRD) has also been granted greater flexibility to temporarily change statutory tax dates, filing deadlines, timeframes and procedural requirements for businesses and individuals impacted by COVID-19. While the IRD have not issued a blanket extension of filing deadlines, it has been confirmed that a pragmatic approach will be applied and that filing deadlines may be extended on a case-by-case basis. The IRD have confirmed that extensions will not be granted for Goods and Services Tax (GST) and PAYE returns, but the IRD have indicated that any penalties for late filing or late payment may be remitted where the delay is due to the effects of COVID-19. 

Wage Subsidy Scheme and Wage Subsidy Extension

In response to COVID-19 a Wage Subsidy Scheme was introduced by the New Zealand government for an initial period of 12 weeks (ending on 10 June 2020). Subsequently, a Wage Subsidy Extension was introduced for businesses which continued to struggle as a result of the pandemic. This includes the self-employed, contractors and sole traders, registered charities, incorporated societies and post-settlement governance entities.

Applications for the Wage Subsidy Extension are open from 10 June 2020 until 1 September 2020.

Eligibility

To be eligible for the Wage Subsidy Extension, businesses must be registered, operating, and physically located in New Zealand. Employees must be physically located in New Zealand. The business must have had a revenue loss of at least 40% for a 30-day period in the 40 days before they apply, compared to the closest period last year (eg, May 2020 compared with May 2019).

Businesses must sign a declaration about their circumstances including confirming that the business:

  • will retain the employees named in their application for at least the duration of the Wage Subsidy Extension (eight weeks);
  • acknowledge that receiving the subsidy does not override the employer’s existing obligations under employment law;
  • will remain responsible for paying their employees’ wages or salaries and, for the period they receive the subsidy:
    1. use their best endeavours to pay at least 80 per cent of each named employee’s ordinary wages or salary; and
    2. pay at least the full amount of the subsidy to the employee; but
    3. where the ordinary wages or salary of an employee named in their application was lawfully below the amount of the subsidy before the impact of COVID-19, pay the employee that amount.

Subsidy rates

The subsidy rates under the Wage Subsidy and Wage Subsidy Extension are:

  • NZD585 (gross) per week for full-time employees, where full-time is 20 hours or more per week; and
  • NZD350 (gross) per week for part-time employees, where part-time is less than 20 hours per week.

The subsidy is paid as a lump sum.   

The Ministry of Social Development (MSD) has published the names of employers who have claimed the subsidy (including the amounts claimed) on their website. The MSD is also auditing businesses to confirm if they, in fact, qualify for the subsidy. 

New Zealand implemented the Foreign Account Tax Compliance Act (FATCA) and the provisions of a Model 1 Intergovernmental Agreement in July 2014.   

In 2017, its tax laws were amended to implement the Common Reporting Standard (CRS) as well as to update New Zealand foreign trust disclosure rules (NZFTDR). Under the NZFTDR, where a non-resident has settled a foreign trust with a New Zealand resident trustee, that foreign trust will need to be registered with the IRD. 

The information that must be disclosed to the IRD is almost exactly the same as that under the CRS, however, it is important to note that the two regimes are entirely separate and there is no automatic exchange of information under the foreign trust rules.

The NZFTDR has the following features:

  • compliance is necessary to maintain the foreign trusts’ income tax exemption, which includes filing the annual return and financial statements;   
  • the trustee needs to file the trust deed, and provide contact details for the settlor, protector, any non-resident trustees, and any other natural persons who have the ability to control the trust;
  • the information disclosed to the tax department is confidential and the register may not be accessed by members of the public; and
  • the information will only be shared by the IRD on receipt of a valid request on notice to the trustee from a New Zealand treaty partner under exchange of information arrangements (double tax agreements, tax information exchange agreements and/or the Multilateral Convention on Mutual Administrative Assistance in Tax Matters).

Wealth Planning Advantages Enjoyed by New Zealand

New Zealand’s Anti-money Laundering and Countering Financing of Terrorism Act 2009, FATCA, the CRS and the foreign trust rules register enhance New Zealand’s reputation as a safe, politically and economically stable country within which legitimately sourced wealth can be protected for future generations. These laws help to uphold New Zealand’s international reputation as a tax-compliant and co-operative jurisdiction. In addition, within New Zealand, the registration of foreign trusts has been effective in restoring public confidence in the industry, as disclosure requirements are similar to those of New Zealand domestic qualifying trusts. 

As a founding member of both bodies, New Zealand is fully compliant with Financial Action Task Force (FATF) and OECD standards and is known as a transparent and safe jurisdiction. 

Furthermore, New Zealand as a jurisdiction provides the following features which are beneficial for international trust and wealth planning purposes: 

  • it is a member of the OECD group of countries;
  • it is party to numerous important double taxation treaties and taxation information exchange agreements;
  • it has comprehensive anti-money laundering legislation;
  • trusts may operate for a maximum of 80 years (soon to be extended to 125 years) and may be terminated at any time; and
  • a New Zealand trust may hold any assets, including property, as well as trade or operate a business.

Individuals tend to pass assets to the next generation freely through wills and trusts. There are no forced heirship laws, and individuals have testamentary freedom. 

New Zealand succession laws apply to a non-resident who has property located in New Zealand as well as to an individual who is living in New Zealand and has property located in New Zealand. 

Trusts are commonly used for family succession, asset protection, to hold businesses and real property, collections, and for charitable purposes. There are approximately 250,000 registered domestic trusts in New Zealand, and 10,000 foreign or international trusts; the actual total is probably close to 400,000. This compares to 204,000 trusts in the United Kingdom (2006).

There is no gift/transfer tax nor estate/inheritance tax in New Zealand. The taxation of domestic trusts is relatively simple and foreign trusts are exempt from income tax on non-New Zealand-sourced income. 

When distributing wealth to family members, taxation of distributions will depend on the tax status of the trust and the tax residence of the beneficiary. Provided none of the assets of the foreign trust are New Zealand-situs assets, then in most cases the income derived from the holding of those assets can be distributed to non-resident beneficiaries, without any liability to tax arising in New Zealand.

However, residents, non-residents and migrants to New Zealand need to be aware of disclosure and reporting requirements that may apply to the proposed wealth transfer under FATCA, the CRS and/or foreign trust rules.

New Zealand does not have forced heirship laws. There is no corresponding legal category under which a foreign court order could be enforced in New Zealand. It would be difficult to sustain an action for the enforcement of a foreign judgment, as the New Zealand-resident respondent would usually hold the assets at issue pursuant to a trust.

Although individuals have testamentary freedom, there are some important exceptions to this principle. In addition to pursuing the standard common law challenges to the validity of a will (lack of testamentary capacity, duress, etc), there are two statutory mechanisms that allow courts to intervene and alter the division of an estate as stated in the will. The Law Reform (Testamentary Promises) Act 1949 provides for the recognition of promises made by a testator during their lifetime to make provision for a person in their will, and the satisfaction of that promise from the estate where no provision has been made for the person challenging the will. The Family Protection Act 1955 allows the court to make orders mandating departure from the dispositive provisions in the will where inadequate provision has been made for persons to whom the testator owed a moral obligation of financial support.

In New Zealand, the Property (Relationships) Act 1976 (PR Act) deals with how the relationship property of married couples, civil union partners and de facto couples is divided when a relationship ends (through separation or death). Usually, it is distributed equally.

Whether the rules in the PR Act apply depends on the characteristics and duration of the relationship.

One spouse or partner cannot transfer relationship property without the consent of the other spouse or partner. They may contract out of the provisions of the Act by entering into a contracting out agreement (sometimes known as a prenuptial agreement). The formalities prescribed under the PR Act must be followed, including the requirements for the agreement to be in writing and that both parties must obtain independent legal advice. The purpose of the formalities is to help ensure that each party understands the effect of the agreement, which may be contrary to their own interests, and to limit the impact of undue influence from the other party to sign the agreement.

Nevertheless, even where the formalities are satisfied, the court may still override the agreement if it considers that enforcement will result in serious injustice to one party. 

However, some judges may be more inclined to enforce the agreement if each party understood the difference in their entitlements at the time of signing the agreement and had merely changed their mind later. 

Furthermore, separate property may become relationship property if it is intermingled with relationship property or used for joint purposes or to purchase joint assets. Additionally, if debts were jointly incurred by both parties, or were incurred for the purpose or benefit of the couple or any child of the relationship, spouses are jointly liable for such debts. A spouse cannot, however, be held liable for debts incurred by either of the respective spouses prior to the marriage.

The PR Act applies to couples residing within New Zealand, regardless of their citizenship.

Usually the transfer of property does not affect the cost basis of property being transferred. However, the transfer or sale of property may be taxable and/or require regulatory consent. 

A residential land withholding tax applies to an entity controlled by offshore persons, an offshore entity and to an offshore person (ie, including a non-resident and New Zealand citizen who has not been resident for three years, or a person who does not hold a resident visa or permanent resident visa) who buys a residential property located in New Zealand and sells it within two years (or within four years in the case of a trust with a beneficiary who is an offshore person). The seller’s main home exemption will not usually apply because the property is unlikely to be an offshore person’s main home if they do not live in New Zealand. 

The Overseas Investment Amendment Act 2018 has drastically changed foreign investment in New Zealand residential property. The main thrust of the Act is that it brings "residential land" within the definition of "sensitive land" for the purposes of the Overseas Investment Act 2005 (OIA). This means that the acquisition of residential land by overseas buyers will now require the consent of the Overseas Investment Office (OIO). Sensitive land also includes non-urban land over five hectares, land situated on most of New Zealand’s outlying islands, land adjacent to the foreshore and seabed, and land with special historical or environmental significance.

There are no gift taxes that would apply to transfers of assets. Usually, no tax planning mechanisms are required to transfer assets to heirs or between generations. 

Inter vivos and will trusts are the most popular family-succession planning vehicles used in New Zealand. 

New Zealand does not have a legal regulatory framework for succession of digital assets such as email accounts, cryptocurrency and blockchain. They are not recognised as currency or property by the Financial Markets Authority, Reserve Bank or the IRD.

There are, however, no legal barriers to transferring digital assets to the trustee of a New Zealand trust. Recent case law has confirmed that digital assets are capable of being added to the trust fund of a trust. Transferring digital assets to a New Zealand trust would entail transferring possession and legal title – ie, by providing the trustee with the means to obtain possession and legal title (such as usernames and passwords, etc).

Families who intend to come to New Zealand as permanent residents should take planning advice in advance of their coming to New Zealand. That way, they can establish pre-migration structures outside New Zealand which can be used to hold families’ overseas investments and property, and which need to be properly managed from a tax and accounting perspective once the beneficial owners become resident.

Trusts

Both on and offshore trusts have been traditionally used as estate planning vehicles in New Zealand since the early 19th century. It is quite common for New Zealand families to hold their assets in trusts. In addition, a large number of New Zealand businesses and significant asset-holding enterprises are held or managed by trusts. 

New Zealand permits the use of private trust companies which have no special regulatory requirements, as there is no request for licensing or registration. Trusts are private documents and are not registered on a public register. 

Foreign trusts (ie, trusts which are established by a non-resident person) are not taxable on their overseas-sourced income. 

New Zealand trust law is well established, with a strong local jurisprudence and court knowledge. New Zealand trust law is derived from English law and is regulated by the TA. In 18 months this Act is being replaced with the Trusts Act 2019 (TA 2019) which is a modern, coherent and useful statute which takes the most fundamental trust law principles from the common law and puts them into accessible legislation for all to understand. It does not codify all trust law but recognises the complexity, nuances and desire for continued development through case law. These reforms will enhance New Zealand’s reputation as a trust jurisdiction.

New Zealand trust law has some unique features, including the ability to have trust advisors, protectors, investment advisers and managers, with wide discretionary powers and the ability to add and remove beneficiaries. A protector or investment manager, who again need not be New Zealand resident, can be given relevant advisory and discretionary powers.  

Limited Partnerships and Companies

The worldwide and New Zealand-sourced income of a company is taxed at 28%. 

A limited partnership is transparent for tax purposes. In determining its income tax liability, the general partner may attribute the partnership’s income, expenses, tax credits, rebates, gains and losses to the underlying partners in proportion to their partnership interests.

The partnership can be a useful offshore vehicle for a non-resident. Partnerships are generally recognised as separate legal entities under foreign law, and therefore can be useful in jurisdictions that do not recognise trusts. A foreign trust could act as the limited partner of the partnership and hold 100% of the partnership interests. The income generated by the partnership assets would therefore flow through to the trust in its entirety. The foreign trust would be eligible for all of the estate, wealth planning and other benefits these offshore trusts offer non-residents under New Zealand law.

A limited partnership consists of the usual general partner (GP) and a limited partner and a simple partnership agreement. The GP manages the business of the partnership and the limited partner takes a passive role to allow it to retain its limited liability. The limited partner's liability for the debts and liabilities of the partnership is limited to its capital contribution.

A limited partnership has the following characteristics:

  • it is registered with the New Zealand Companies Office (the partnership must keep its own register of limited partners at its registered office); 
  • it must have a New Zealand registered office;
  • it will require at least one GP that is New Zealand resident;
  • however, the limited partner need not be a New Zealand resident; and 
  • any legal person may be a GP or a limited partner. 

The New Zealand government recently passed the COVID-19 (Requirements For Entities - Modifications and Exceptions) Act 2020 which enables entities, including companies and limited partnerships to use electronic means to (including electronic voting and the use of electronic signatures) where the entity’s constitution or governing document wouldn’t normally permit this. 

Foundations

New Zealand does not have foundations laws so a foundation may not be established under New Zealand law. They may be recognised as an incorporated entity such as a company or limited partnership. They are commonly used as part of offshore structures for non-residents.

Trusts are recognised and respected in New Zealand. There are no forced heirship rules under New Zealand law, and there is no analogous legal category under which forced heirship concepts can easily be accommodated. In addition, New Zealand is not a signatory to the Hague Convention on trusts, and its courts are, therefore, not required to take into account the customary or legal requirements of foreign jurisdictions in relation to trusts. Consequently, attempts to enforce the judgment of a foreign court based on forced heirship principles against a New Zealand resident trustee would face significant hurdles. 

Generally, foreign structures which are established and funded by New Zealand tax residents, are taxed in New Zealand on their New Zealand-sourced and worldwide income. 

Where a New Zealand resident holds a controlling interest in a foreign company, the income of the controlled foreign corporation (CFC) will be attributable to that resident in proportion to their respective interest, unless 95% or more of the CFC’s income is derived from an active business enterprise, in which case an active participation exemption applies. Holdings in foreign companies, which are not controlled by a New Zealand resident (known as a Foreign Investment Fund or FIF), result in the attribution of the FIF’s income to a New Zealand resident shareholder in proportion to their shareholding, if those holdings are "attributing interests" for tax purposes. 

If a New Zealand tax resident receives beneficiary income from a domestic trust or foreign trust (with a non-resident trustee), foundation or similar entity, then the resident will in most cases subject those distributions to income tax.

Where a New Zealand resident serves as a fiduciary or trustee, he or she will need to consider disclosing the trust to the IRD. Under Foreign Trust Disclosure Rules, all foreign trusts with a non-resident settlor must be registered with the IRD. Thereafter, an annual return setting out the trust’s settlements and distributions must be filed along with financial statements within six months of the trust’s elected balance date. 

Domestic trusts that earn income must be registered with the IRD to obtain an IRD number, as this income is generally taxable in New Zealand. The annual income tax return of the trust will also include details of distributions of trustee and beneficiary income made to beneficiaries.

Unlike some offshore jurisdictions, the ability to reserve powers is not enshrined in the TA or the TA 2019. However, under trust law it is permitted for the settlor to draft a trust deed that confers powers on the settlor, protector and other third parties. It is common for settlors to reserve powers to appoint and remove the trustee. A settlor may retain the power to amend a trust deed.

The scope of power to amend the trust deed must be carefully drafted before the trust is established. Should the trustee or settlor propose an amendment in the future, such amendment must have been contemplated by the parties when the trust deed was made.

It is not recommended that a settlor retain extensive powers, as this may undermine the nature of the trust and make the arrangement appear to be a nominee arrangement between the settlor and trustee rather than a discretionary trust. 

In addition, in Clayton v Clayton (2016) NZSC 30, the Supreme Court followed the decision in Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited and others (2011) UKPC 17 in holding that reserved powers are property and therefore may be taken into consideration when reviewing the assets of a settlor in divorce proceedings.

The most popular method of protecting assets in New Zealand is through the use of trusts. Trusts are part of New Zealand’s culture and it is estimated that there are between 300,000 and 500,000 trusts operating in New Zealand, making it the highest concentration of trusts per capita globally. 

While tax is not taken into consideration when establishing trusts, New Zealand does offer favourable tax treatments for trusts when compared with other jurisdictions. For New Zealanders settling assets into a trust, there is also no estate duty, gift duty, stamp duty or capital gains tax.

New Zealanders use family trusts to protect assets for beneficiaries from creditors, relationship-property claims, risky business ventures and lawsuits.

New Zealand domestic trusts are private and confidential. There is no public registry of trusts or an obligation to submit information to any government or public body if the trust earns no income.

New Zealand foreign trusts must be registered with the IRD; however, the register is not public and cannot be accessed by the general public. Any information registered with the IRD will only be disclosed if there is a valid request from a government authority in New Zealand or overseas under the relevant tax information exchange agreement entered into with that particular country. 

For these reasons, people may establish more than one trust to hold different assets for different benefits or beneficiaries.

Legal advisers and trust specialists know that family business succession planning can be a complex and emotional subject. Planning can take time and requires advisers to be patient with their clients, as the process can vary depending on the individuals involved and the assets they hold. 

Business succession planning is not only for large businesses or high net worth individuals in New Zealand. Business owners (whether of small or medium-sized businesses) are encouraged to create and implement a sound succession plan to ensure the business’s continuous and smooth transition to the next generation or the new owners. 

Accordingly, New Zealand company constitutions or limited partnership agreements may contain provisions allowing for business succession between shareholders. Commonly, these set out a mode of pre-emption on a notice of sale or the death of a partner or equity owner which enables that person’s share to be valued and disposed of to the continuing owners. 

An alternative method of business succession planning is through the use of trusts. The shares or participation in the company or partnership are held in a trust which is then distributed to family members or others at dates agreed by or fixed by the settlor. 

Business succession planning can also include the use of asset protection and estate-planning arrangements such as limited liability companies, wills and relationship-property agreements.

Transferring a partial interest in a New Zealand entity does not trigger tax consequences.

The market value of the interest is based on an accountant or business broker’s assessment of the overall value of the entity. However, since there are no tax consequences, valuations are merely done for accounting and other non-tax-related reasons. 

The TA 2019 was enacted on 30 July 2019 and comes into force on 30 January 2021. This Act replaces the TA, which is outdated, and provides a welcome modernisation of New Zealand’s trust laws. It takes the most fundamental trust law principles (including common law principles) and puts them into accessible legislation for all to understand.

It does not codify all trust law but aims to simplify core trust principles and essential obligations for trustees. The TA 2019 recognises the complexity, nuances and desire for continued development through case law. 

It is expected that the clarification of common law principles in the TA 2019 will help to avoid or reduce wealth disputes.

Information Disclosure Requirements

The majority of differences between the TA 2019 and the TA are already well established in case law. The same applies to the information disclosure provisions that cover the presumption for disclosure (and the exceptions) found in the New Zealand Supreme Court’s decision in Erceg v Erceg (2017) NZSC 28 which replaced the UK Privy Council’s decision in Schmidt v Rosewood Trust Ltd (2003) UKPC 26 as the leading authority in New Zealand for this issue.

The TA 2019 introduces a presumption under Section 51 that "…a trustee must make available to every beneficiary the basic trust information." The Bill defines "basic trust information" as:

  • the fact that a person is a beneficiary;
  • the name and contact details of the trustee;
  • the details of appointments, removals and retirements of trustees as they occur; and
  • the right of the beneficiary to request a copy of the terms of the trust or trust information.

Incorporating these principles into trust legislation adds nothing to the common law as it currently stands, it merely clarifies and creates certainty around the trustee’s "duty to disclose information".

Concerns

There are three principal areas where concern has been expressed. Firstly, that beneficiaries may, in obtaining information, "attack" the trust and question the decisions of the trustees; secondly, that the interests and needs of individual beneficiaries may be different, and in some circumstances, the trustee may have concerns about advising the individual that he or she is a beneficiary; and thirdly, how a trustee can ensure the information reaches every beneficiary, given that classes of beneficiaries can be very broad.

However, the requirement to pass information to beneficiaries is not absolute; there are exceptions.

Section 53 provides for a list of 13 factors that the trustee must take into consideration before deciding whether it is appropriate to provide the information to the beneficiary. These factors are comprehensive, and if they do not provide the trustee with the reassurance it seeks, Section 53(m) allows them to consider "any other factors that the trustee reasonably considers are relevant to determining whether the presumption applies."

The same presumption to disclose information and its exception apply equally to the more in-depth "trust information" under Section 52. It is important to note that here, trust information does not include reasons for trustees’ decisions.

Section 54 covers the procedure that applies when the trustee decides not to provide the information. Here, the trustee must apply to the court for direction that the decision to withhold information was reasonable. However, under Section 54(3), if one beneficiary already has the basic trust information, this will not apply, and the trustee will be free to exercise its discretion not to provide the information to the other beneficiary(ies). (Clearly this will be satisfied where the settlor is also a beneficiary.)

Claims can be made by a limited partner against the general partner and other limited partners of a limited partnership, by shareholders against directors and by beneficiaries against trustees of trusts. Civil claims can be filed in the High Court.

Corporate fiduciary services are common in New Zealand with independent providers providing trustee and corporate services for local and international clients. However, given the trust culture, most trusts are administered by individuals or their personal lawyer or accountant. 

It is also common for private client law firms or accounting firms to provide corporate services and/or trusteeship. The conduct of fiduciaries and/or trustees is governed by the TA and the TA 2019 and other principles derived from case law. 

Trustees are expected to take the same standard of care as an ordinary prudent person of business in the circumstances of a trust, act in the best interests of the beneficiaries and treat them in an even-handed manner. There is also a requirement that the trustee invests prudently, and the TA and the TA 2019 set out a number of factors the trustee is required to take into account when making investment decisions. 

Professional trustees (corporate or otherwise) that are remunerated for their trustee services are expected to exercise a higher standard of diligence and knowledge than an un-remunerated trustee. This includes duties under the Financial Transactions Reporting Act 1996, where the trustee is required to report any unusual trust settlements or transactions and those under the Anti-money Laundering and Countering Finance of Terrorism Act 2009, where the trustee must conduct due diligence prior to accepting their trustee role.

It is possible to pierce the veil of companies and trusts in New Zealand in limited circumstances. 

The assumption in New Zealand is that trusts serve as a means by which settlors can protect their assets and preserve their capital for their benefit and that of future generations. However, the case is not the same when it comes to relationship property, with more and more trusts being attacked.

Relationship property is governed under the Property (Relationships) Act 1976 (PR Act), where the PR Act serves to achieve a fair division of property when a relationship comes to an end. Claims under the PR Act and claims of constructive trust pose challenges to trusts. 

In the recent case of Clayton v Clayton (2016) NZSC 29 and Clayton v Clayton (2016) NZSC 30, the Supreme Court ruled that powers to control a trust may constitute property under the PR Act. 

The PR Act can also apply in situations where a person has disposed of property into trust with the intention of defeating their partner's claims or rights under the Act. Under these circumstances, the court can recover property from the trust or order one partner to compensate the other to avoid serious injustice to one party.

Other remedies found in the law of equity include claims that a trust is invalid because it is a sham, alter ego or illusory trust or a claim that a trust is subject to a constructive trust for the benefit of one of the partners.

Trustee investments are regulated under the TA and the TA 2019 where the trustee is able to invest in any property but must do so with diligence and the same care as an ordinary prudent person of business would have when managing the affairs of others. Where the trustee’s profession, employment or business involves acting as trustee or investing money for others, the trustee must exercise the same level of care, diligence and skill as when engaged in their own employment or business.

Furthermore, Section 13E of the TA sets out a non-exhaustive list of considerations that a trustee may take into account in exercising a power of investment, as follows: 

  • the desirability of diversifying trust investments;
  • the nature of existing trust investments and other trust property;
  • the need to maintain the real value of the capital or income of the trust;
  • the risk of capital loss or depreciation;
  • the potential for capital appreciation;
  • the likely income return;
  • the length of the term of the proposed investment;
  • the probable duration of the trust;
  • the marketability of the proposed investment during, and on the determination of, the term of the proposed investment;
  • the aggregate value of the trust estate;
  • the effect of the proposed investment in relation to the tax liability of the trust; and
  • the likelihood of inflation affecting the value of the proposed investment or other trust property.

The remaining provisions in the TA impose a duty on the trustees to comply with any requirement imposed on investment by the trust deed, and empower the trustee in relation to company securities, applying trust capital to pay a call on shares, and making certain loans and investments on the strength of a valuation, and they provide that the trustee will not be liable for losses caused by reason of improperly secured investments.

Prior to 1988, the TA included a list of authorised investments which required the trustees to invest in specific approved investments using the trust funds. By 1988 changes to the law abandoned the list of authorised investments and through the Trustee Amendment Act 1988 the "prudent person" standard was created which requires the application of modern portfolio theory, where trustees are required to make investments that would increase trust income but minimise risks. 

Accordingly, the amendments to the law brought about portfolio management as the approved method of trust investment in New Zealand. Portfolio management is a recognised method of investment and one that satisfies the prudence test found in the Trustee Amendment Act 1988.  

The TA permits the trustee to delegate its investment powers to professional investment advisers, something which most New Zealand trustees do if the trust is substantial and consists of financial assets, as opposed to the majority of trusts which tend to hold one primary asset, the family home.

Section 59 of the TA 2019 continues the prudent person standard and adds two further considerations, which require the trustee to have regard to the objectives or permitted purpose of the trust and the trustee’s overall investment strategy.

Visas

New Zealand has several visa categories, some of which can lead to residency. The criteria for obtaining a visa for New Zealand is determined by the New Zealand government’s Immigration Policy. In setting out the Immigration Policy, the New Zealand government considers the competing forces of economic growth, cost to the state and security. 

The main categories for residency are as follows:

  • Business Category;
  • Family Category;
  • Skilled Migrants; and
  • Residence from Work.

The Business Category is best suited for those seeking to invest or operate a business in New Zealand. This category includes what are known as the Investor 1 and 2 categories and the Entrepreneur Work and Residence Visa.

Other pathways to residency are subcategories of the Skilled Migrant category and Residence from Work. 

Qualified and skilled migrants may be eligible for a work visa under the Long-Term Skill Shortage List Work category, the Regional Skill Shortage List, the Construction & Infrastructure Skill Shortage List, the Talent (Accredited Employers) Work category or the Skilled Migrants category.

All these categories have different requirements and applications can be made based on the applicant’s eligibility. Due to the impact of the COVID-19 epidemic, visa applications by applicants currently inside New Zealand are prioritised over applications where the applicant is overseas. 

Citizenship

Citizenship in New Zealand is administered by the Department of Internal Affairs and can be obtained by birth, descent or it can be granted. To be eligible for citizenship by descent, an applicant must have at least one parent who is a New Zealand citizen. To be eligible for citizenship by grant, an applicant must: 

  • have an intention to stay on in New Zealand;
  • have held residence status for five years prior to making an application for residence;
  • have a good understanding of English;
  • be of good character; and
  • have an understanding of the responsibilities and privileges of New Zealand citizenship. 

Once an application is approved, the applicant is invited to make an oath of allegiance or an affirmation of allegiance at a citizenship ceremony. Due to the impact of COVID-19, citizenship ceremonies have been cancelled until further notice.

The Department of Internal Affairs may choose to interview an applicant prior to granting them citizenship.

An expeditious pathway to residency and citizenship can be through the Business Category (mainly the Investor 1 and 2 category visas). New Zealand’s investor visas are open for all investors who want to gain residence in New Zealand. 

Investor 1 Visa

To be eligible for an Investor 1 visa, applicants must: 

  • invest NZD10 million in an acceptable investment in New Zealand for three years; 
  • meet certain health and character requirements; and
  • stay in New Zealand for at least 44 days in each of the last two years of the three year investment period or 88 days at any time over the three year investment period if the investment is a minimum of NZD2.5 million in growth investments.

Investor 2 Visa

Eligibility for the Investor 2 visa is based on a points system that requires applicants to first submit an expression of interest to Immigration New Zealand. Provided the applicant satisfies the visa criteria, they are awarded points and are then invited to apply for residency. 

Points are awarded according to the applicant’s age, health, character, English-language capabilities, business experience and investment funds. Once invited to apply, applicants must:

  • invest a minimum of NZD3 million in New Zealand assets over four years; 
  • spend 146 days in New Zealand in each of the last three years of the four-year investment period or 438 days over the four-year investment period; 
  • have a minimum of three years' business experience;
  • have sufficient English-language ability; and
  • be under 65 years of age. 

Acceptable Investment

Applicants must prove investment funds were lawfully acquired by submitting high-level evidence, and New Zealand investments must fit the "acceptable investment" criteria, which can be:   

  • equity in New Zealand firms (public or private); 
  • bonds, issued by the New Zealand government, New Zealand local authorities or approved New Zealand banks, finance companies or firms; 
  • new residential property development that is not for the investor’s personal use and designed to make a commercial return on the open market; and
  • philanthropic investment (up to 15%). 

Overall, the investment must be capable of making a commercial return under normal circumstances, contribute to New Zealand’s economy and not be for the personal use of the investor.

Planning for minors and adults with disabilities is done through the use of trusts. Minors are protected through inter vivos trusts or inheritance trusts. Inheritance trusts provide certainty and security that assets will be held and protected for minors despite what the future may hold. These types of trusts offer benefits throughout the minor’s or disabled adult’s lifetime and assets held in trust can be distributed or applied for the benefit of the minors or disabled adults at any stage, even while the parents or caregivers are alive. 

Some of these trusts are established by a will and are accompanied by a letter of wishes setting out what the parents or caregivers wish to happen with the trust fund.

Parents of children (mothers and fathers) are automatically guardians of their birth child and are referred to as the child’s natural guardians. 

People other than the natural guardians can become legal guardians through an appointment via the Family Court.

Other than testamentary guardians, the arrangement of appointments of guardians is governed by the Care of Children Act 2004 (the CCA) and the Oranga Tamariki Act 1989 (the OTA). A person other than the natural guardians can apply to become a caregiver of a child or young person under the CCA. The Family Court may then appoint that person as a guardian either in addition to an existing guardian or as sole guardian. 

If a child is in need of care or protection, an additional guardian can apply to the Family Court for a guardianship order to be appointed as guardian. 

Testamentary guardians are those appointed by a will. The appointment takes place upon the granting of probate. Testamentary guardians have certain guardianship responsibilities in contributing to the child’s development, providing a safe and secure home, schooling, medical treatment and social aspects, such as language and culture. Responsibilities do not extend to providing day-to-day care for the child. If testamentary guardians wish to have the child in their care, they have to apply to the Family Court for a Parenting Order. 

As testamentary guardians can be appointed after the death of only one of the child’s parents, the testamentary guardian will then be a guardian alongside the surviving parent. Appointments can be challenged by the parent or existing guardian by way of an application to the Family Court.

People are encouraged to seek professional legal, financial and medical advice to plan ahead while they still have the legal capacity to do so and to sign documents. 

A popular arrangement is the use of Enduring Powers of Attorney (EPAs). EPAs are legal documents that can be set up for "personal care and welfare" and/or for "property". The document works while the donor is alive and allows someone else (the attorney) to act on their behalf if they cannot, or do not wish to, look after their own affairs. The attorney’s main responsibility is to act in the donor’s best interest. 

An EPA for personal care and welfare is set up to manage the donor’s personal health and well-being. The appointed attorney will look after things such as accommodation and medical decisions. This EPA is invoked when the donor is no longer capable of making or communicating their decisions, and can only be given to one individual. 

An EPA for property is set up to manage the donor’s financial affairs and assets. The donor can specify a certain date when they want the EPA to take effect if they wish to do so prior to becoming incapacitated. The donor can also give the appointed attorney full power over all their property, or limit the power to certain property. 

The arrangement is different from a will as it deals with decisions taken while the donor is still alive and only comes to an end by written notice to the attorney or once the donor dies . 

The person with powers of attorney can be a family member, a trusted friend or a professional such as a lawyer or accountant. For the elderly, an EPA can provide peace of mind that their well-being and property will be well looked after while they are alive. 

EPAs are very specifically dealt with under New Zealand law and clients are required to seek independent advice before granting anyone an EPA. They are also encouraged to speak to the people they intend to name as their attorneys. 

While other arrangements are recognised in New Zealand, an EPA under the laws of another country is unlikely to be recognised. Accordingly, migrants settling in New Zealand with New Zealand property, or those who may regularly spend time in New Zealand, are encouraged to make an EPA. 

In light of the COVID-19 epidemic, the Government made certain changes under the Epidemic Preparedness (Protection of Personal and Property Rights Act 1988-Enduring Powers of Attorney) Immediate Modification Order 2020 to modify the requirements for signing and witnessing EPAs under Section 94A of the Protection and Property Rights Act 1988. The change now allows for EPAs to be signed and witnessed using audio-visual links as oppose to this being done in person. All people signing a copy of the EPA must make it clear on the copy that it is signed via an audio-visual link due to the current Epidemic Notice in force.

Without an EPA, loved ones and spouses must seek an order from the Family Court to deal with personal care and welfare. The order can be specific to an issue or it can appoint a welfare guardian to make general welfare decisions. 

The same can be done for property, where the Family Court appoints a property manager to make decisions on how assets are to be dealt with.

The adoption of children in New Zealand is governed under the Adoption Act 1955. Adopting a child in New Zealand requires the adoptive parents to make an application to the Family Court, and in most cases formal consent of the birth parents is required. 

If the child being adopted is not from New Zealand, then it is considered an inter-country adoption, which is governed under the Adoption (Inter-Country) Act 1997. 

New Zealand law considers the birth mother and her partner as the legal parents of a child. The birth parents are named on the child’s birth certificate and are the parents for all legal purposes. In order to become the legal parents of the child, the intending parents or guardians must file an adoption application and legally adopt the child. 

Accordingly, all laws relating to inheritance apply as if the child was born to the adoptive parents. 

Children born to a surrogate mother are considered to be her legal children. While surrogate pregnancy arrangements are recognised in New Zealand, commercial surrogacy is illegal. 

Under a surrogate pregnancy arrangement, the intending parents have no parenting rights over the child regardless of whether one or both of them donated their genetic material for the pregnancy.

Becoming the legal parents of the child requires the intended parents to file an adoption application through the Family Court. The court must also be satisfied that the intended parents are fit and proper people capable of adopting the child. The surrogate mother and/or her partner must consent to the adoption. 

Adopted children have the same inheritance rights from their adoptive parents as the biological children of those parents. The same applies for children who are born to parents outside the traditional arrangement of marriage. 

Adopted children have the right to receive property from their adoptive parents under New Zealand’s intestacy laws. For example, if a parent dies without a will or an estate plan, the adopted children have the same rights to the estate as the biological children. The Family Protection Act 1955 allows adopted children to claim against the estate if they are not adequately provided for in the will.

Unions of same-sex couples have been recognised in New Zealand since 2005 under the Civil Union Act 2004. 

In 2013, the definition of marriage found in the Marriage Act 1955 was extended to include same-sex couples and defined marriage as the union of two people, regardless of their sex, sexual orientation, or gender identity. Accordingly, same-sex marriage is recognised in New Zealand.

New Zealand’s tax treatment of charities encourages charitable giving, as it offers a tax deduction to the donor. Charitable organisations that are registered can be granted an exemption from income tax. 

Provided the charitable organisation is an approved donee, individuals can claim a 33.33% tax rebate on the amount they donate. Companies can also claim a tax deduction for donations made to an approved donee providing the claim does not exceed the company’s total annual net income. 

An approved donee is a non-profit organisation which can include a society, association or a group. The organisation can be incorporated or unincorporated. The activities of the organisation must not be conducted for profit or the gain of any member, and the rules of the organisation must not allow any money or property to be distributed to any member. Approved donees can also include overseas aid organisations.

Many people donate a portion of or all of their estate to charities whether through their family trusts or through their wills. Some also create charitable trusts through their will.

Charities in New Zealand can be set up and run through charitable trusts or incorporated societies. 

Charitable Trusts

Charitable trusts are subject to the same rules as any other trust. However, to be registered under the Charitable Trusts Act 1957, a charitable trust must exist for a charitable purpose. 

The trust must have a deed of trust or a document setting out the aims of the trust and how it will be run. It is important that there is a clear intention to donate property for a charitable purpose, which must be clearly defined as having a purpose for the benefit of the community. 

When making an application to register the charitable trust with the Registrar of Incorporated Society, it is important to show that the trust’s activities are lawful and there will be no personal gain from the assets of the trust by a private individual. 

The Charitable Trusts Act 1957 allows for trustees of a charitable trust to become incorporated as a charitable trust board. As a charitable trust board, it is easier for them to hold money or assets and carry out activities for charitable purposes, as they can limit their liability. Furthermore, they can have perpetual succession.

Incorporated Societies

An incorporated society is an organisation registered and incorporated under the Societies Act 1908. To be eligible for registration, the organisation must exist for a lawful purpose, not be primarily commercial in purpose and should not distribute profits to private individuals or shareholders, etc.

When registered, an incorporated society gains its own legal identity, which separates it from the identity of its members. This means its members are generally not personally liable for the society's debts, contracts or other obligations and the society can continue to exist as a legal entity even though its membership may change. 

Under the Societies Act 1908, an incorporated society cannot operate for financial gain and must have at least 15 members. The members must also have a set of rules that sets out in detail the purpose of the society, how it will be managed, how members can join, how meetings will be conducted and how its assets will be used and handled. 

An incorporated society can enter into contracts in its own name, purchase or sell property and borrow funds in its own capacity. 

If the incorporated society’s aim and purpose is exclusively for charitable purposes and its board of trustees, members or associates are operating a non-profit organisation, it can then register with the Charities Services, and apply to the IRD to have a non-profit tax exemption. 

The government recently passed the COVID-19 Response (Requirements For Entities-Modifications and Exceptions) Act 2020 to give charitable trusts and incorporated societies relief from certain obligations in their rules and make possible the use of electronic means including electronic voting and the use of electronic signatures when their constitution or rules wouldn't normally permit this. Furthermore incorporated societies can also make certain modifications to their constitutions or rules if a majority of their governing officers believe it is no longer practicable to comply with certain provisions such as those that call for or hold meetings, rules relating to dispute resolution or waving, suspending, deferring or reducing fees payable by members.

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Trends and Developments


Authors



Hesketh Henry is a commercial law firm based in Auckland, New Zealand. The private wealth team comprises: three partners, one senior associate and three solicitors. They advise clients on a wide range of services with a focus on trusts and estates; establishing, administering and restructuring trusts and advising on trust structures; opinions on complex trust issues for existing clients of the firm and referrals from other law firms; preparing and advising on relationship property agreements and help in assisting in the resolution of relationship property issues; wills and advice on issues that arise relating to wills and estate planning; enduring powers of attorney; administering estates; trust disputes and advice on the establishment and operation of charitable trusts; establishing family office structures and advice in managing those through the generations. The firm is unique in that it combines a depth of expertise in both contentious and non-contentious areas of private wealth law. There are also two practitioners in the litigation team that specialise in this area of law.

Introduction

No doubt, the year 2020 will be remembered for the impact of COVID-19 on all walks of life – private wealth being no exception. The other major themes in the New Zealand private wealth space include the Trusts Act 2019 and initiation of a review of the law of succession.

As for many other things, COVID-19 has caused significant instability in the private wealth context. Changes in legal processes have been required and the economic impact of the virus has renewed dialogue on taxation, among other changes to the regulatory environment.

The Trusts Act 2019 (Trusts Act or Act) continues to be a major theme. There is increasing awareness and understanding among practitioners of the emphasis of the Trusts Act on plain language drafting, in keeping with its aim to make trust law more accessible to lay trustees and beneficiaries; as well as the Trusts Act's requirements for disclosure of trust information to beneficiaries and the common changes that may be required to existing trust deeds.

Following its review of the law on the division of relationship property, the New Zealand Law Commission has commenced a review of the law of succession. The Law Commission is currently conducting preliminary consultation with stakeholders to identify the key issues arising under the existing legal framework.

COVID-19

Legal processes

In response to COVID-19, New Zealand was on "full lockdown" from 25 March 2020 to 28 April 2020. During this time, all New Zealand residents were required to self-isolate in their homes and practise social distancing. After the lockdown, restrictions were progressively eased over May and early June 2020.

Given the restrictions on movement and social distancing requirements, clients faced difficulties in attending lawyers' offices to complete legal processes, which, under the existing legal framework, were required to be completed during face-to-face meetings. Temporary exemptions were introduced by the legislature, courts and other regulatory authorities to allow use of audio-visual technology to overcome the issues caused by self-isolation and social distancing.

Some of the temporary exemptions, which were introduced in the private wealth context, are discussed below.

Witnessing of wills and enduring powers of attorney

Immediate Modification Orders were introduced in relation to wills and enduring powers of attorney. Under normal circumstances, Section 11 of the Wills Act 2007 requires wills to be signed before two independent witnesses. During the lockdown period, will-makers were generally only in contact with their family members and had difficulty finding independent witnesses. Similarly, under New Zealand law, enduring powers of attorney must generally be signed before an authorised witness (usually a practicing lawyer) after the donor has been advised on the implications of the enduring power of attorney. The witness is required to sign a certificate to this effect. In the past, standard practice has been for both wills and enduring powers of attorney to be signed in the physical presence of the relevant witnesses.

In order to allow wills and enduring powers of attorney to be made in self-isolation, the government passed the Epidemic Preparedness (Wills Act 2007 – Signing and Witnessing of Wills) Immediate Modification Order 2020 (Wills IMO) and the Epidemic Preparedness (Protection of Personal and Property Rights Act 1988 – Enduring Powers of Attorney) Immediate Modification Order 2020 (EPA IMO).

Broadly, the Wills IMO and the EPA IMO allowed wills and enduring powers of attorney to be signed and witnessed by audio-visual or audio link (eg, via Zoom, Skype or FaceTime). For wills, changes were permitted to the attestation clauses included in the wills and the will-maker and witnesses could each sign separate copies of the will. The witnesses, generally, were required to sign certificates in relation to the process followed for signing and witnessing the wills. Similarly, under the EPA IMO, the donor, the attorney(s) and the authorised witness were each able to sign separate copies of the enduring power of attorney. In all cases, each copy of a will or an enduring power of attorney was to be returned to a single holder as soon as practicable (including in electronic form).

Land transfer authority and instruction forms

Title to land in New Zealand is held under the Torrens system of land registration. An electronic land register is operated by Land Information New Zealand (LINZ) and it provides proof of the ownership of any particular land. Registration on the land register as the owner of an estate or interest in land generally provides indefeasible title (in the absence of fraud). Therefore, strict protocols are in place to ensure no changes are made to the land register without authority from the relevant parties and without their identity being confirmed. The parties to a land transaction are generally required to sign an authority and instruction form (A&I) which confirms that the client authorises the dealing with land and his, her or its identity.

Generally, A&Is must be signed by a client and witnessed by a lawyer "in person". However, clients could be identified, and A&Is signed and witnessed, using audio-visual link, if the legal practitioner had known the client for more than 12 months and various other requirements were met. On 30 March 2020, LINZ extended this rule to permit the use of audio-visual technology to identify new clients (not known for more than 12 months) and witness the signing of their A&Is. Practitioners were given flexibility in taking other reasonable steps to verify their client's identity. These steps could include making use of identity information held by the Department of Internal Affairs (which oversees AML compliance by law firms), relying on robust digital signing services, and obtaining written confirmation directly from the client's bank that it has carried out sufficient identity verification procedures on the client.

Compliance with AML identity verification requirements

Law firms' compliance with the Anti-Money Laundering and Counter-Financing of Terrorism Act 2008 is overseen by the Department of Internal Affairs (DIA). During the lockdown, the DIA recognised that compliance with customer due diligence procedures may be difficult or impossible, and accordingly, provided some leeway. In particular, the DIA authorised customer due diligence procedures to be carried out in a delayed manner, as soon as practicable after the COVID-19 Alert Levels were lifted and after the business relationship had begun. Under normal circumstances, customer due diligence must be completed (where applicable) before any work is completed for the client.

In general, there was a greater focus on adopting a "risk-based" approach to customer due diligence.

The above exemptions were only temporary. The various Immediate Modification Orders were made under Section 15 of the Epidemic Preparedness Act 2006 and are revoked on the expiry of the Prime Minister's Epidemic Preparedness (COVID-19) Notice 2020. Despite their temporary nature, the exemptions allowed new legal processes to be trialled which may inform future reform.

Other processes undertaken by law firms also underwent change. As would be expected, remote signing of other documents and the use of electronic signature software also became more common.

Nevertheless, in our view, the use of remote technologies was not suitable for all matters. In the private wealth context, we experienced greater difficulty in identifying potential issues of testamentary capacity while taking instructions over audio-visual link. Body language and other non-verbal cues were more difficult to grasp. We also encountered difficulty in seeking capacity assessments over audio-visual link from medical practitioners.

Regulatory environment

The New Zealand general election is scheduled for 19 September 2020. Given the impact of COVID-19, there may be regulatory changes which will be relevant for trustees, including when they consider their powers to invest trust property.

The current Labour government has previously considered introducing a comprehensive capital gains tax (CGT), across a broad range of asset classes. The report of the Government's Tax Working Group (TWG) was released in February 2019. Due to insufficient support from coalition partners, the government was, at the time, unable to proceed with a CGT. Prime Minister Jacinda Ardern later publicly stated that she would not implement a CGT while she remained Prime Minister.

In light of recent government spending, the need to stimulate economic growth and the fiscal burdens anticipated by the government in the long term, the issue of taxation may become relevant again following the 2020 election.

The TWG's report discussed several proposals which may be re-considered in the future, including the extension of the taxation of capital gains. The majority of TWG members supported a broad-based GGT (excluding the family home) but a minority preferred incrementally subjecting different asset classes to CGT over time. Changes to marginal tax rates for individuals was canvassed (although raising the top marginal tax rate was beyond the TWG's terms of reference). Changes to the company tax rate were also raised. The TWG recommended that no change be made at this time.

Other changes that have also been raised for debate include raising the superannuation entitlement age from 65 years to 67 years, as a means of reducing government expenditure.

As a part of its 2020 election campaign, the Green Party has suggested a wealth tax. At the time of writing, it is proposed that tax be charged at a rate of 1% of the value of an individual's net equity that is above a NZD1 million threshold, and at a rate of 2% of the value of net equity above a NZD2 million threshold. At the time of writing, the other main political parties in New Zealand have largely opposed the proposal.

Trusts Act 2019

The Trusts Act comes into force in January 2021. It will partially codify trust law in New Zealand. The Trustee Act 1956 will be repealed and replaced with more comprehensive legislation. Some areas of trust law have been reformed.

Plain language

The Act distinctly shifts towards plain English in keeping with its aim to make trust law more accessible. The Trusts Act seeks to summarise and restate trust law principles using everyday terms. By way of example, the Trusts Act expressly sets out the duties already imposed by on trustees by law, with the aim of improving trust administration. To ensure the law is accessible to lay trustees and beneficiaries, these duties are summarised using modern language.

A clear hierarchy of trustee duties is set out. Trustees' duties are divided into mandatory duties, which cannot be modified or excluded by the terms of the trust, and default duties. Default duties may be modified or excluded by the terms of the trust. Any adviser who is paid to prepare the terms of the trust or to advise in relation to them is obliged to alert the settlor to any such modification or exclusion.

The rule against perpetuities, which was often difficult for lay trustees and beneficiaries to understand and apply, has been abolished and the maximum lifetime of a trust has now been set at 125 years.

Clauses in the terms of trust that limit, exclude or provide indemnities for trustees' liability for breaches that involve dishonesty, wilful misconduct or gross negligence are invalid. Advisers who prepare or advise on the terms of trust must take steps to ensure the settlor is aware of the meaning and effect of any such clauses.

Prescriptive rules will govern what documents trustees must hold and how they must hold them. For example, Section 45 of the Trusts Act provides that the trustees must hold the trust deed, any variations to the trust deed, records of trust property, records of trustee decisions, any written contracts, accounting records, etc.

Rather than including a lengthy list of the powers of trustees, Section 56 of the Trusts Act simply provides that a trustee has all the powers necessary to manage the trust property and all the powers necessary to carry out the trust. The Law Commission considered that trustees' powers should be wide and regulated by imposing clear duties on the use of those powers.

Trusts practitioners are currently considering the extent to which they will update their trust deed templates to ensure they use plain, easily understandable, language and are consistent with the terminology used in the Trusts Act.

Beneficiary disclosure

Prior to the Trusts Act, the law on beneficiary disclosure was not always well understood by lay trustees and beneficiaries. The Trusts Act provides for two presumptions. The first is that trustees must make available basic trust information to every beneficiary. Trustees bear the onus of providing information, regardless of whether it is requested. Basic trust information includes the fact that a person is a beneficiary of the trust; the name and contact details of the trustee; details of any appointment, removal or retirement of trustee; and the right of the beneficiary to request a copy of the terms of trust or trust information.

The second presumption is that trustees must give a beneficiary trust information requested by that beneficiary. Trust information means any information regarding the terms of the trust, the administration of the trust or the trust property which is reasonably necessary for the beneficiary to have in order to enable the trust to be enforced. It does not include reasons for trustees' decisions.

When considering whether to give basic trust information or, if requested, other trust information, the trustees must have regard to the factors set out in Section 53 of the Trusts Act. If, after considering these factors, the trustees reasonably consider that the relevant information should not be provided to the beneficiary, the presumptions are rebutted and do not apply.

If a person, who was not previously aware that he or she was a beneficiary of a trust, receives basic trust information, there is a real possibility he or she will request further trust information.

This was recently demonstrated by the New Zealand Court of Appeal's decision in Addleman v Lambie Trustee Limited [2019] NZCA 480. Mrs Addleman and Ms Jamieson (sisters) were discretionary beneficiaries of the Lambie Trust. The trust was settled in 1990, using funds received by Ms Jamieson as compensation for an injury she had sustained. There was evidence that the trust was primarily intended to benefit Ms Jamieson. Mrs Addleman was unaware of the trust's existence until 2001, and after being notified of its existence by the trustees, requested further information. She requested copies of the trust deed, all financial accounts from the trust's inception and other trust documents. To the date of the hearing, the trustees had only disclosed the trust deed and the identity of the trustees.

The court held this disclosure was insufficient for Mrs Addleman to assess whether the Trust had been properly administered. Assurances given by the trustees to Mrs Addleman that all distributions from the trust fund were proper and in accordance with their duties under the law were disregarded. The court held that:

"while a beneficiary does not have an absolute right to the accounts, the circumstances in which such accounts may be properly withheld from a close beneficiary are likely to be limited. As the Supreme Court observed in Erceg, 'the strongest case for disclosure would be a case involving a request from a close beneficiary for disclosure of the trust deed and the trust accounts, which would be the minimum needed to scrutinise the trustees' actions in order to hold them to account'."

For trusts that have wide classes of beneficiaries (as was common in past drafting practice), the beneficiary disclosure obligations may be onerous. The volume of documents that potentially may be requested could be significant, especially for older trusts (such as the one in Addleman). Also, the preliminary consideration of whether the presumptions apply and how the various factors in Section 53 should be weighted may be difficult.

In New Zealand, many trusts are family trusts settled by parents for the benefit of themselves and their children. There is concern about how disclosure of the trusts' assets and income may impact parent-child relations.

Review of trust deeds

As expected, trust practitioners have received many instructions to review trust structures, as a result of the changes brought about by the Trusts Act. Among other things, trust reviews commonly consider whether the scope of beneficiaries included within the trust deed reflects the wishes of the settlor, and if not, whether some beneficiary classes should be excluded. Other considerations are whether any exclusion of liability and indemnity provisions in the trust deed comply with the Trusts Act and whether the maximum duration of the trust can be increased. In some cases it is appropriate to review whether the trust deed includes appropriate grounds for the removal of trustees. Section 103(2) of the Trusts Act provides that trustees may be removed on the basis of any grounds set out in the trust deed.

Lawyers also review whether appropriate provision has been made for the power of appointment and removal of trustees (or any other power typically held by an appointor or a protector) to be delegated on the death or loss of mental capacity of the person in whom such power is currently vested.

Review of the Property (Relationships) Act 1976 and the Law of Succession

In July 2019, the New Zealand Law Commission published its final report on its review of the Property (Relationships) Act 1976 (PRA). The Law Commission concluded that the PRA does not reflect New Zealanders' contemporary attitudes towards the division of property on separation.

Some of its key recommendations (among others) included that the family home should no longer be automatically treated as relationship property and subject (usually) to equal division. Instead, if one partner owned the home before the relationship began or received it as a third party gift or inheritance, only the increase in the home's value during the relationship should be shared.

It explored whether the courts should have broader powers to "look-through" trusts and ensure a just division of property when a trust holds property produced, preserved or enhanced by the relationship.

It found that the law should apply equally to all marriages, civil unions or de-facto relationships. Currently, some provisions, such as Section 182 of the Family Proceedings Act 1980 (which allows relationship property claims against "nuptial settlements") only apply to married couples.

It considered issues of jurisdiction. To avoid proceedings needing to be transferred to the High Court, it found that the Family Court's jurisdiction should be expanded to include jurisdiction over all aspects of relationship property matters, including in relation to trusts, companies and general civil law where relevant.

It found that children's best interests, including rights to occupy the family home immediately after separation, should be given greater priority in relationship property matters.

It also canvassed the possibility of a new family income sharing arrangement that provides for family income to be shared beyond the end of a relationship, for a limited period.

The Law Commission is considering the rules applying to relationships ending with death as a part of a broader review of succession law. The Government will consider the Law Commission's reports on the PRA and succession law together.

The Law Commission is currently consulting with stakeholders in relation to the key issues arising in relation to succession law. Issues which have been raised at this preliminary stage include the fact that the intestacy rules need to be updated for changes in attitudes, society and family structures. For example: Section 77 of the Administration Act 1969 provides that where the deceased has a spouse and children, the spouse gets all personal chattels, a sum of NZD155,000 (with interest from the date of death) and one third of the residuary estate.

Comparatively, under the PRA, the spouse or partner may be entitled to up to one-half of all assets of the deceased's estate classified as relationship property. Also, with blended families becoming more common, the entitlement of step-relatives needs to be considered further. Initial consultation also shows that some parts of society may be less likely to make wills, and are therefore likely to be disproportionately affected by the intestacy rules. It needs to be considered whether intestacy rules are appropriate for their circumstances.

Another issue is that New Zealand succession law generally favours testamentary freedom. However, this is limited by the Family Protection Act 1955 (FPA) (among other laws). The FPA recognises that a will-maker owes moral duties to various family members. If the will-maker makes insufficient provision in his or her will for a family member, that person can apply to the court for provision from the deceased's estate. Stakeholders have commented that the FPA creates unaffordable litigation for estates as there is usually significant uncertainty about the scope of the moral duty owed by the will-maker and what constitutes "sufficient" provision under the will.

Conclusion

The key themes in 2020 have been the impact of COVID-19 on legal practice, a greater awareness of changes brought about by the Trusts Act, and the potential for further reform as result of the Law Commission's review of the PRA and its ongoing review of succession law.

We expect the Trusts Act will continue to be a dominant theme in the year ahead.

Hesketh Henry

Level 14
188 Quay Street
Auckland 1010
New Zealand

+64 9 375 8700

+64 9 309 4494

lawyers@heskethhenry.co.nz www.heskethhenry.co.nz
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Law and Practice

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Cone Marshall Limited is a leading global and independent advisory and fiduciary services firm comprised of lawyers, trust officers, wealth planners and accountants. It specialises in trusts, wealth and asset management, succession planning, tax planning and fiduciary services. The firm advises on how to securely and efficiently structure wealth and plan for its succession to future generations, and it aims to meet clients' needs, whether domestic or international, individual, family or business. The team has special skills in resolving conflicts of law across multiple legal systems. Formed in New Zealand in 1998, Cone Marshall has expanded into a global group, which now administers trusts and related entities across multiple jurisdictions, with offices in the USA (New York, Wyoming and Florida), Hong Kong, Montevideo, São Paulo, Geneva, Lugano, London, Milan, Athens and Tortola, British Virgin Islands.

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Hesketh Henry is a commercial law firm based in Auckland, New Zealand. The private wealth team comprises: three partners, one senior associate and three solicitors. They advise clients on a wide range of services with a focus on trusts and estates; establishing, administering and restructuring trusts and advising on trust structures; opinions on complex trust issues for existing clients of the firm and referrals from other law firms; preparing and advising on relationship property agreements and help in assisting in the resolution of relationship property issues; wills and advice on issues that arise relating to wills and estate planning; enduring powers of attorney; administering estates; trust disputes and advice on the establishment and operation of charitable trusts; establishing family office structures and advice in managing those through the generations. The firm is unique in that it combines a depth of expertise in both contentious and non-contentious areas of private wealth law. There are also two practitioners in the litigation team that specialise in this area of law.

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