Provisional Tax payments for ratio option customers and GST returns and payments
GST returns and payments for period ended 31 October
NOTES FROM IRD
From 29 August 2019, the IRD’s Use of Money Interest (UOMI) rates changed.
The new rates are:
- underpayments – 8.35% (up from 8.22%)
- overpayments – 0.81% (down from 1.02%)
IRD is moving away from Cheques
From 1 March 2020, IRD will no longer accept cheques.
This includes post-dated cheques (cheques dated after 1 March 2020). If you pay by cheque, we encourage you to get a head-start on finding other convenient and secure payment options that work for you.
SUBDIVISIBLE LAND & TRUSTS
Many taxpayers have trusts and often leave the balance of their estate to a trust established during their lifetime or one created by will.
Taxpayers should be mindful that the exemption that applies to the subdivision of a taxpayers dwelling from taxation of gains realised from the disposal of the resulting lot, does not apply to a trust which has owned the land for less than 10 years.
Furthermore if a taxpayer leaves subdivisible land to a trust and the trustees proceed to subdivide that land, the land will be caught in the land taxing provisions even though the deceased taxpayer has owned the land for more than 10 years.
The reason for this is that the Income Tax Act deems the deceased to have sold the land to the executors and the executors to have in turn on sold the land to the trustees. Even though the trustees are associated with the deceased, the trustees are not seen to have acquired the land when the deceased did. This is because the rule relating to transfers to associated persons can only be applied once.
SHORT PROCESS RULINGS
If you need to obtain a clarity or certainty from IRD in relation to a contemplated transaction, you may wish to consider applying for a short process ruling. It is an alternative to a binding ruling.
Historically applying for a Ruling with IRD was a long drawn up and costly exercise, where the taxpayer’s tax agent often had to draft the ruling themselves setting out the background facts to a transaction, legal proposition, analyse respective case law and legislation as it applies to the case at hand.
Whilst short process rulings are not designed to replace the former binding rulings, these are meant to be quicker and less expensive, whilst still giving taxpayers the necessary certainty that they are looking for.
Short-process rulings are only available for individuals and organisations with annual gross income of $20 million or less in the last tax year (or if they didn’t exist in the last tax year, they expect to meet that income threshold in the year the ruling relates to). Also, the application must relate to a situation involving tax of less than $1 million. So larger taxpayers will need to use the formal binding ruling process.
CIR estimates that the ruling process will take 6 weeks at a maximum cost of $ 2,000. One is yet to see if the 6 weeks turnaround is achievable given the fact that a simple piece of correspondence can take 15 – 60 working days.
TRUSTEES & LIABILITY?
CHANGING TRUSTEE FROM INDIVIDUAL TO A CORPORATE
The tax benefits offered by trusts are well known to many. What is less known are the risks attached to being a trustee. As a trust is not a separate legal entity, but rather a fiduciary arrangement, there is no surprise that the income tax legislation follows suit and that the liability for taxes is attributed to the trustees.
Regardless of how many trustees there are, and whether or not a trustee was aware of a decision made by other trustees, the trustees are treated as the same notional single person under HC2(2) of Income Tax Act 2007 (ITA). Consequently, the trustees have joint and several liability in relation to taxes. This also applies in cases where income is distributed to beneficiaries. In this case the trustees retain personal liability as agents under s HC32(3) of ITA.
The situation with GST is similar. S 57 of the GST Act 1985 (GSTA) recognises Trusts as separate taxpayers. Whilst this may be a good thing, s 57 of GSTA places joint and several liability on all trustees for the trust, even if they are no longer trustees.
S 57(3B) of GSTA is useful in this regard as it provides a way out, provided that the Commissioner is notified of the change in the Trustee. The trustee continues to be liable until such time as the trustee notifies the Commissioner of his/her retirement.
The body of case law has demonstrated how far the Commissioner will go to pursue the trustees in satisfaction of the respective liabilities. Courts have also confirmed that the liability also extends to passive trustees and/ or professional trustees. For all of you out there holding trustee positions be mindful of the liabilities that can arise. The simple excuse “I was not aware” is just not good enough.
One may think that having a corporate trustee will solve this problem. Whilst this may seem logical on the face of it, the Commissioner is increasingly seeking to apply remedies offered under the Companies Act with the view to pursue the directors of Corporate Trustees for unpaid taxes. Remedies invoked by the Commissioner often involve s 135 and s 136 of the Companies Act (COA).
- Under s 135 a director must not allow or cause a company to carry on business in a manner likely to create a substantial risk of loss to its creditors (this would include IRD)
- Under s 136 a director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.
If you hold a trustee position please be mindful of the liabilities that the trustees and/or directors of corporate trustees might have in relation to unpaid taxes. Having a corporate trustee alone will not provide the necessary protection. It is recommended that you take an active role as opposed to a passive role, as ignorance or simply not being aware of what is going on is simply not going to be enough. If you do resign as a Trustee, please make sure that you notify the Commissioner of such resignation as soon as is practically possible.
TRUST LAW CHANGES
The new Trusts Act 2019 (The Act) was given royal assent on 30 July 2019 and will come into force on 30 January 2021. Whilst this may feel like a long way off, it really is not. This time should be used wisely for the existing trust deeds to be reviewed and possibly varied where necessary.
There are some useful provisions in the Act, for example the perpetuity period has been extended to 125 years from the existing 80 years and the age of majority for beneficiaries has been set at 18 years of age. Furthermore there is no longer the requirement for two or more natural persons as trustees.
The Act sets out Trustee Duties. These are classified into two categories, the Mandatory Duties and the Default Duties. There are also Other duties which deal with keeping of core documents and disclosure of information to beneficiaries.
Mandatory Duties (see s 23-27) cannot be excluded or modified include:
- duty to know the terms of Trust
- duty to act in accordance with terms of Trust
- duty to act honestly and in good faith
- duty to act for benefit of beneficiaries
- duty to exercise powers for proper purpose
There are quite a few default duties such as general duty of care, to invest prudently, etc. These are listed (see s 28 – 39 of the Act). Most of them are logical, however the below will cause problems for most:
- to act unanimously,
- to act for no reward,
- not to exercise any power for own benefit
Whilst default duties can be modified or excluded, unless expressly excluded they will automatically apply. There is an extra burden on the advisor who must ensure that the Settlor understands the modifications or exclusions if any.
Trustees acting in a professional capacity will have an issue with “acting for no reward” not only that they are offering their time to perform trustee duties but it is also a requirement of most PI policies to charge for trustee services.
Another curly one is to “act unanimously”. Whilst this may be a good idea in theory it may give rise to difficulties in resolving problems and disputes.
The duty not to exercise power for own benefit is also problematic. This raises questions where mum and dad are Settlors, trustees as well as beneficiaries. Does this mean that they can no longer enjoy living in the family home owned by their Trust or use their family batch?
This is a rather bizzare outcome and one way around it is to modify or exclude these curly default duties. The Trust should be fit for the purpose that it was set up for.
The trustees are also required under the Act to keep core documents for the duration of the trusteeship, and are required to pass on that information. Consequently, the Trustee is not able to destroy documents pertaining to the Trust just because the statutory period of 7 years has lapsed.
WHAT ARE CORE DOCUMENTS?
S 45 of the Act lists core documents that must be kept
by the Trustees such as the Trust Deed, variations, list of assets and liabilities, record of trustees decisions (resolutions/ minutes), written contracts, accounting
records, appointment and removal of trustees incl. court orders, memorandum of wishes, any other documents necessary for administration of the Trust.
BENEFICIARY RIGHT TO INFORMATION
The biggest headache that the Trustees will face is the introduction of beneficiary right to trust information. What does this mean?
In simple terms the Trustees must notify every beneficiary of “basic trust information“ in writing that:
- the person is a beneficiary of the Trust,
- the name & contact details of the Trustees,
- the occurrence of, and details of each appointment, removal and retirement of a trustee as it occurs, and
- the right of beneficiary to request a copy of the Trust Deed & Trust information.
There is also a need for trustees to consider at reasonable intervals whether the trustees should be making the basic trust information available. The presumption is that the trustee must provide basic trust information.
The purpose of these rules is to ensure that the beneficiaries have sufficient information to enable the terms of the Trust and the trustees duties to be enforced against the trustees.
Whilst the Act does not prescribe a time frame within which a trustee must notify the beneficiaries, other than “within a reasonable period” (see s 52), the recommendation out there is within 2-4 months from the Act coming into force.
DO TRUSTEES HAVE TO PROVIDE INFORMATION?
This depends on various factors. Trustee can chose to withhold some or all of the basic trust information but only upon careful consideration. S 53 of the Act provides a list of factors that must be considered. The trustee must consider the nature and purpose of the information requested.
In essence the trustee must have regard to the following:
- The nature of the interest that the beneficiary has in the trust
- Whether the information is subject to personal or commercial confidentiality
- The age and circumstances of the beneficiary and other beneficiaries of the trust
- The effect on trustees, beneficiaries and third parties in giving the information
- In case of family trusts the effect on family relationships, as information could give rise to family conflicts, and relationship breakdowns.
- The practicality of giving information in redacted form
EXEMPTION & INDEMNITY CLAUSES
The Act precludes the trustee’s liability being limited or excluded for any breach of trust arising from trustee’s dishonesty, wilful misconduct or gross negligence. Furthermore, the trust must not give any indemnity against trust property for liability for any breach of trust arising from trustee’s dishonesty, wilful misconduct or gross negligence. (see s40-41). Consider a situation where a professional trustee fails to obtain tax advice in relation to a property subdivision and the Court determines that failure to obtain tax advice amounted to gross negligence on the part of the Trustee. Suddenly the trustee could be out of pocket for thousands of dollars.
A trustee may, however, be indemnified for gross negligence from Trust property for breach of trust if all beneficiaries agree and beneficiaries obtain legal advice before consenting to such indemnity (see s 82).
A liability exclusion or an indemnity clause for breach of trust (other than dishonesty, wilful misconduct or gross negligence) can be included in the trust deed, however the Settlor must be advised of the meaning and the effect of such clause. (see s43).
If you have any quetsions regarding the upcoming changes please feel free to contact us.
Who would have thought that Christmas is fast approaching. If you have not brought in your information just yet, please do so, so that your tax returns can be prepared in a timely manner. If we do not receive your information by 22 December 2019, we cannot guarantee that your returns will be prepared on time, although every effort will be taken to meet the deadlines.
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