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Site Archives Trusts

Trustees liable to pay liquidators for company’s losses

This item has been adapted from an article written by Marilyn Hay

In the case of Rowmata Holdings Limited (in liq) v Hildred, the High Court has held that liquidators of a company were entitled to repayment of GST receipts from associated parties (two trusts) that had received them.

Background

The matter arose from a sale and purchase agreement for the purchase of land where two trusts (the purchasers) did not have the financial ability to settle. Before settlement date a company incorporated by the purchasers claimed a GST refund from the purchase some of which it paid out to the trusts in settlement of debts. When the purchasers subsequently defaulted at settlement date, the GST refund became repayable to Inland Revenue but there were no funds held by the company to meet this liability. The company went into liquidation and the High Court agreed with the liquidators that they were entitled to recover the entire amounts claimed from the trustees of the trusts.

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Trust income from property transactions liable for income tax and GST

This item has been adapted from an article written by Marilyn Hay

A recent Taxation Review Authority (TRA) decision has held that amounts derived by a trust that bought and sold properties were income on the basis that the properties were acquired for the purpose of intention of sale. The TRA also held that the trust was in the business of erecting buildings and that the exemption for residential land did not apply in this case. In addition, the TRA found that the trust was deemed to be registered for GST. The trust was therefore liable for income tax and GST output tax on the sales of the properties. The TRA also found that the trust was grossly careless when taking its tax position and that shortfall penalties should be imposed for gross carelessness.

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Review of the Law of Trusts

The Law Commission’s Report, Review of the Law of Trusts: A Trusts Act for New Zealand, was tabled in Parliament today (11 September 2013).

The Report recommends the introduction of a new Trusts Act to replace the current Trustee Act 1956.

The proposed new Trusts Act will be a comprehensive statute that modernises the law of trusts in New Zealand.

The Report contains 51 recommendations in total relating to trusts.

See below for links to the paper and the summary of recommendations.

Law Commission Review of the Law of Trusts

The Law Commission has advised that it will be publishing its next report (following from the six issues papers) on the review of the Law of Trusts shortly.
Hard copies of this report can be requested in advance by e-mailing lmccormick@lawcom.govt.nz.

The pre-order price estimate is $65.00.

Pre-order requests should be made by 15 July 2013.

A thumbnail guide to AML/CFT

Thought needs to be given to trust compliance in the face of new Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) laws. The main compliance components of the AML/CFT Act, which is New Zealand’s contribution to the international Financial Action Task Force (FATF) come into effect on 1 July 2013.

Banks, casinos and other financial institutions have been putting compliance regimes in place in anticipation of the forthcoming laws taking effect. By contrast exemptions in the regulations to the AML/CFT Act that apply to lawyers and accountants may have lulled many trust practioners into a false sense of complacency about “somebody else’s problem”.

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GST – the forgotten tax

Given the far reaching nature of goods and services tax, it is surprising how often the imposition or impact of GST is disregarded, forgotten or left subject to multiple interpretations. The recent case of Sayes v Tamatekapua [2012] NZCA 524 provides ample illustration of the cost and delay when GST is not expressly addressed. In fairness to the parties it is noted that the deed of settlement did provide for how any tax or gift duty was to be paid.

However, what was not expressly addressed was whether the value of property that would be transferred pursuant to a deed of settlement was to be valued on a GST-inclusive or GST-exclusive basis. The valuation mechanism was relevant as it would determine ultimate shares in the estate. The High court found that the current market value was determined on a GST-exclusive basis, a finding that was up-held by the Court of Appeal.

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Commissioner appeal in Newmarket Trustees allowed

The Court of Appeal has overturned the High Court decision in CIR v Newmarket Trustees Limited (2011) 25 NZTC¶20-030 (the liquidations judgment).  See Commissioner of Inland Revenue v Newmarket Trustee Limited [2012] NZCA 351

Background

Newmarket Trustees is a corporate trustee that acts for a number of trusts.  Newmarket Trustees is insolvent due to unmet tax liabilities in respect of one if the many trusts of which it is a trustee.  Despite the company’s insolvency, which was not in dispute, the High Court took a pragmatic approach and elected to exercise its residual discretion under s 241(4) of the Companies Act and dismissed the application.  Read more

Budget 2012 residential care subsidy threshold changes

In addition to tax changes outlined in Talk Tax, Budget 2012 also changes how annual increases to exempt asset thresholds are calulated.   An annual flat $10,000 per year increase, which was to apply until 1 July 2025, has been replaced with an annual CPI adjustment.

This little hearalded move means that the asset thresholds that would have increased from $210,000 and $115,000 (the lower limit, which is not available to all applicants, is in addition to the family home and car) to $220,000 and $125,000 on 1 July 2012; will now (presuming amending legislation is enacted in current form) increase on 1 July 2012 to the lesser amounts of $213, 297 and $116,806 resepctively.

The changes to the thresholds mean that it will take longer for some applicants to become eligible for a residential care subsidy.

References:

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Penny & Hooper – legitimate tax planning or avoidance?

The Supreme court has today released its long-awaited decision about a landmark tax case – Penny & Hooper. The case was decided in favour of Inland Revenue and this decision has widespread implications for the many small businesses using trust structures.

The case is a classic example of taxpayers complying with the ‘black-letter’ of the law, yet not acting within the ‘scheme and purpose’ of the Income Tax Act.

This case involved the restructuring of the business of two surgeons (Penny & Hooper) from sole practitioners earning an income of approximately $500,000 per year, into a company owned by a family trust for the benefit of the surgeons and their respective families. The surgeons became employees of their companies, on salaries of approximately $120,000 per year, while the remainder of the profit from their services was retained by the companies and allocated to the trusts.

Legitimate tax planning or avoidance – what is your view?

Dastardly Duty may be Demolished

This blog considers the likely consequences if Gift Duty were to be abolished.  The Government has recently announced that such a move is being considered.  Every practitioner should be aware of this possible shift, as it is likely to have an impact on just about every individual they advise. The Government has said that a period of consultation will be undertaken, and if Gift Duty is to be abolished, the proposal will be contained in a Bill to be released in November 2010.

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