Dear %sphilo_MsgToName%,
On 25 July 2006 the Government released its Business Tax Review discussion document, which outlines possible "tax initiatives to increase productivity and boost New Zealand's international competitiveness". It suggests a range of measures, including reducing the company tax rate to 30%, reducing the top personal tax rate to 36%, increasing the tax rate for Trusts which retain income to 36%, and changes to the depreciation rules. The deadline for submissions is 8 September 2006. For more information see the media statement, questions and answers and the discussion document.
Our Managing Director Ross Holmes says that a result a review of all trading trusts, business share owning trusts and investment trusts is essential. In his opinion in future the Family Trust should own the family home, all loans should be made to the Family Trust, and separate business and/or investments Trusts (with a wide range of beneficiaries including companies and other Trusts) should be used to own income producing investments and shares in private companies.
Means testing of people over the age of 65 (or those aged 50 to 64, single with no dependent child) for long-term geriatric care is carried out according to legislation and regulations. Income and asset tests apply.
Dramatic changes have occurred to the residential care subsidy means testing rules since 1 July 2005 which make it essential to take expert advice (and to restructure Trusts and ownership of assets) before applying for the residential care subsidy. If you make an application for the residential care subsidy without taking expert advice, and if need be restructuring, you could well be seriously affected.
The changes are as follows:
Income:
Under Part 3 of Schedule 27 of the Social Security Act and the Social Security (Long Term Residential Care) Regulations 2005 (which came into force on 1 July 2005). Income which is not means tested is:
50% of any amount received by the person and by his or her spouse or partner by way of a pension under a superannuation scheme registered under the Superannuation Schemes Act 1989:
50% of any amount received by the person and by his or her spouse or partner under an annuity paid in respect of a policy of life insurance offered or entered into in New Zealand by a life insurer; or offered or entered into outside New Zealand by a life insurer that is resident in New Zealand.
The income of the person's spouse or partner that is earned by the personal effort of the spouse or partner.
The first $805 per person ($1,610 per couple) earned from assets.
Income from a war disablement pension.
Assets:
Loans owed to you by a Trust are treated as your assets for residential care subsidy purposes. Before going into geriatric care it is absolutely essential that you consult a trust specialist (such as Ross Holmes Trusts Limited) to consider the need for restructuring of Trusts and personal assets in order to ensure that you receive the benefit of the following exemptions. Once you have lodged an application it may be too late.
Under Part 1 of Schedule 27 of the Social Security Act 1964 and the Social Security (Long-term Residential Care) Regulations 2005 the following asset exemptions apply:
Asset Exemptions: |
Single |
Couple - one in a rest home |
Couple - both in a rest home |
From 1 July 2005 |
$160,000 plus $10,000 per year from 1 July 2007 |
$65,000 plus your house and car plus $10,000 per year from 1 July 2007 |
$160,000 plus $10,000 per year from 1 July 2007 |
In addition also exempt from means testing are household furniture and effects; personal belongings such as clothing and jewellery; and personal collectables or family treasures or taonga such as artworks, books, stamps, and antiques (Regulation 10).
Gifting:
The regulations made under section 65 of the Social Security Act are the Social Security (Long-term Residential Care) Regulations 2005. They provide in summary:
There has been a significant change since 1 July 2005. The total allowed gifting amounts are now per application and not per couple. When both partners go into care then the gifting values double.
In the last 5 years before the application the exempt gifting is up to $5,000 per year per application.
Gifts in recognition of care of up to $25,000 may be permitted (see Regulation 9A below).
For gifts made more than 5 years before the application the exempt gifting is $27,000 for each year per application. It is only if both partners enter care that the total allowable gifts are $54,000 per year.
The effect of disposing of assets or income on geriatric care means testing
In New Zealand clause 4 of Part 2 of Schedule 27 of the Social Security Act 1964 contains anti-avoidance provisions intended to prevent assets and/or income being disposed of in order to qualify for a residential care subsidy. It provides:
assets, in relation to the person being means tested, means the assets of the person and his or her spouse or partner (if any) that are capable of being realised by the person or his or her spouse or partner; and includes-
(a) the value of any right, under a contract or arrangement with any person, to be paid or repaid money on termination of a licence to occupy part of any property, building, or premises, adjusted to take into account any conditions or restrictions on that right:
(b) the value of assets that have been gifted by the person, the person's spouse or partner, or both during the prescribed gifting period immediately before the date of means assessment; but does not include any allowable gifts, or the value of any allowable gifts, prescribed by regulations made under section 155:
(c) the value of any property (other than property that would be an exempt asset) that the chief executive, in his or her discretion, is satisfied that the person or his or her spouse [or partner] has directly or indirectly deprived himself or herself of
Eligibility of a beneficiary of a discretionary trust for financial assistance
If an applicant and/or his or her partner are merely beneficiaries of a discretionary trust, no part of the value of the trust's assets is assessable until the trustees make a distribution from the trust's capital. This is because there is no way of apportioning a share of the trust's assets to any particular beneficiary until the trustees have exercised their discretionary powers: Karl v Director-General of Social Welfare [1994] 3 NZLR 497.
Assessment of income to trust beneficiaries
Except as detailed above, only distributions of income from discretionary trusts to beneficiaries are treated as income for the purposes of means testing. This is because a beneficiary of a discretionary trust has no right to the trust's income, even if he or she is also a trustee. A beneficiary receives a distribution solely at the trustees' discretion, in accordance with the terms of the trust deed.
The courts have ruled that the fact that a person is a beneficiary of a discretionary trust does not on its own entitle the chief executive of The Ministry of Social Development to exercise his or her discretion under section 74 of the Social Security Act to refuse that person a means-tested benefit: Karl v Director-General of Social Welfare [1994] 3 NZLR 497.
Testamentary trusts
New Zealand has no special means testing rules for testamentary trusts. The case of Mrs Elsie Karl is an illustration of this fact. On your death, if your will leaves your assets to a trust, all assets not already in the trust are put in. This completes your gifting. On the death of the first of a couple assets left to a trust will be safe from geriatric care means testing if the surviving partner needs geriatric care.
Our Managing Director Ross Holmes has recently given expert evidence in the Taxation Review Authority in a tax avoidance case. That case involved a trust which ran a business. The sole trustee of the Trust was a company, with the settlors and their accountant as the Directors and shareholders. The accountant's involvement was limited. The couple used the Trust's bank account as their own and did not consult their accountant concerning any deposits into or withdrawals from the Trust's bank account. The Trust allocated substantial income to the children as beneficiaries. No minutes were made of those income allocation decisions prior to 30 September each year (the cut off date for valid income allocation minutes). In addition the Trust credited the parents with substantial sums for the maintenance and support of the children (with no records of how those maintenance and support payments were justified. Proper book keeping, accounting and trustee procedures were rough and ready or non-existent.
Far from the accountant as an"independent" company Director of the trustee adding credibility, he damaged credibility. The taxpayer had to establish on the balance of probabilities, that there had been a proper exercise of an income allocation discretion by the trustees. While the Taxation Review Authority's decision is awaited, the taxpayers' lack of proper procedures and record keeping damaged their case. A trust bank account should never be used for personal purposes, and all trustees (or Directors of Trustee companies) must take in all major decisions. In relation to investments if it is not practical for all trustees to make decisions on management of those investments there must be a proper delegation to a trustee or manager, authorised by the Trust Deed.
For some time some lawyers have maintained that a trust will be disregarded if it is the settlor's "alter ego" or puppet. This is because a number of family court decisions in Australia and New Zealand have incorrectly created the impression that if a trust is the "alter ego" or "puppet" of the settlor it can be disregarded.
The recent New Zealand High Court case of Official Assignee v Wilson has confirmed our view that legally that is not the case.
Trusts as an "alter ego", "puppet" or "nominee" of a settlor
A number of family court decisions in Australia and New Zealand have incorrectly created the impression that if a trust is the "alter ego" or "puppet" of the settlor it can be disregarded. As detailed by Ross Holmes in the latest update to the Chapters written by him in Lexis Nexis (legal publishers) "Law of Trusts", the recent New Zealand High Court case of Official Assignee v Wilson (High Court, Dunedin, CIV 2004 425 74, 12 April 2006, Chisholm J) has confirmed our view that legally that is not the case.
Legally the description of the trust as the "alter ego" or "puppet" of a settlor is not sufficient on its own to make it a sham if it reflects the genuine intention of the parties. In Marriage of Gould (1993) 17 FamLR 156 at 167 (which was applied in G vT [2003] FamCA 1076 by O'Reilly J) Fogarty J stated:
"36. On the other hand, the description of an entity as the 'alter ego' or 'puppet' of a person really denotes something different. Correctly described, it is not an assertion that it is a "counterfeit, a facade or a false front". Rather, it describes an actual situation although as a matter of law or practicality the actions of the other entity may be capable of and may in fact be controlled by the party in question. For example, a party may establish a trust over which he or she exercises control. That trust may in turn own or control property. It may be correct to describe that trust as the alter ego or even perhaps the puppet of that party, but it would not be correct to describe its existence or its ownership or control of property as a sham. Transactions entered into by it under which it deals with its property by, for example, a transfer of property to a third party would not be a sham transaction. It is likely to be a genuine transaction although the evidence may demonstrate that the transaction was carried out 'by direction of or in the interest of' the party."
In Marriage of Gould was applied in Official Assignee v Wilson. As Chisholm J, stated at para 58:
[58] The underlying common intention requirement for a sham has been consistently adopted by the Court of Appeal and is clearly binding on this Court. If alter ego trusts were to be automatically recognised as shams that underlying requirement would be negated. The result would be that a half way house between a conventional sham trust and a valid trust would be created. In Re Secuitibank Limited (No.2) at 168 Richardson J seems to have rejected the possibility that there is any half way house. I accept that view. It seems to be that to adopt a half way house would be to effectively re-write the traditional understanding of a sham."
Chisholm J distinguished the earlier New Zealand High Court decisions in Prime v Hardie [2003] NZFLR 481, (2002) 22 FRNZ 553 (as in that case a sham had not been pleaded and Salmon J expressly upheld the objection of counsel for the plaintiff to that matter being raised), and Glass v Hughey [2003] NZFLR 865, (2003) 23 FRNZ 674 (on the basis that Priestley J's comments in that case were probably obiter).
The "Alter ego" trust cases
A number of Australian and New Zealand family law decisions show a failure to appreciate what a "sham" is, and need to be treated with a great deal of caution. They show a tendency to attempt to do justice in the circumstances, without identifying the correct legal principles.
In Prime v Hardie [2003] NZFLR 481 Salmon J stated:
[30] What is clear on the evidence, however, is that the trust was effectively Mr Hardie's alter ego. He was the principal (although not the only) beneficiary. He borrowed the money which enabled the trust to purchase its assets. He paid the interest on the mortgages and rates and insurance. In the 1998 financial year his personal income return showed an apparently fictitious rental received from Rahopara Street of $3600 and deductions for interest, depreciation and other items resulting in a net loss of $10,975 which he claimed as a tax deduction against his personal income. There is no doubt that the Rahopara Street house and before that, the Dallinghoe Crescent property, were the family homes for the couple and their children. In those circumstances I see no reason why a constructive trust should not be imposed upon a property owned by a trust. That too is the view expressed by the authors of Butterworth's Family Law Service, Commentary 2 binder [*16] at para 7.204.
In Glass v Hughey 24 Priestley J applying Prime v Hardie stated by way of obiter:
[89] As an additional and alternative route to the same result I find that the trust has for all intents and purposes been disregarded by the husband so far as his operation of International is concerned and, so far as the wife's claim is concerned should be regarded as a sham or more particularly the husband's alter ego.
[90] In Prime v Hardie [2003] NZFLR 481, 486, Salmon J held that a trust which owned the family home was the husband's alter ego. Although Salmon J did not specifically refer to them, there are Australian authorities which make it clear that Courts will disregard trusts which are a spouse's alter ego or a sham to ensure that a family property claim is not unfairly defeated. (See In the Marriage of Bowman (1984) FLC 91- 574; In the Marriage of Stein (1986) FLC 91-779; In the Marriage of Ashton (1986) FLC 91-777; In the Marriage of Goodwin (1990) 14 Fam LR 801; In the Marriage of Davidson (1991) 14 Fam LR 817).
With respect both Prime v Hardie and Glass V Hughey incorrectly treated a finding that the was the "alter ego" of a party as meaning that the trust could be treated as that party's. That would only have been legally possible (in the absence of a statutory provision authorising this) if the trust was a sham and therefore invalid.
The old decision in Case s43 (1995) 17 NZTC 7,293 is essential reading for trusts wishing to allocate income to children.
Judge Barber in the Taxation Review Authority. Under trust deeds income allocated or paid to children can only be paid or applied to their parents, if it is for the benefit of the children. Parents have a liability to maintain children until at least 16. Judge Barber held (at page 7,300):
"Generally speaking, the money purported to have been debited to the beneficiaries was for necessities (in terms of the child's right to maintenance). ....It seems to have been for the benefit of the father in that his existing family commitments were being reconstructed to reduce his incidence of income tax.... The proper procedure in terms of the trust deed requires an exercise of their discretion by trustees regarding each expenditure, or at least, as to an appropriate practice or strategy."
Our trust folders and tabs were changed last year. Present clients of Ross Holmes Trusts Limited only can update to the latest folders and minutes at a cost of $150 per Trust. Please contact Kirsty Hourigan on 4150099.
Business clients can now prepare a wide range of documents on www.DYOdocs.com at a fraction of the legal costs normally payable.
Select your document on www.DYOdocs.com, follow the simple steps and generate your chosen document online. There are a wide range of documents available from Company formations, Agreements for sales and purchases of businesses, Partnership deeds and many more documents still coming.
Please contact rossholmes@rossHolmes.co.nz or visit the www.DYOdocs.com for further information.
Dates and times, as well as an online enrollment form for our trust adminsitration seminars are on our web site www.rossholmes.co.nz. Simply click here; or phone us on 4150099. Those seminars are free for clients. We also run Trust Administration seminars for non-clients. You will also find the dates and times of our normal "Success with Trusts" seminars on line. You are welcome to invite others along free to our "Success with Trusts" seminars.
Ross Holmes Group recently purchased the Eastern Rug Gallery. It is situated at 23 Crowhurst Street, Newmarket, Auckland, and is open 7 days. All rugs are hand wowen and personally selected by Neejat Kavvas (one of New Zealand's leading rug experts). The Eastern Rug Gallery is currently having a sale with 50% discounts off most rugs. Their phone number is 09-5200320. For a map showing the location see www.easternrugs.co.nz
Our DVD "Success with Trusts" is now available free from our office or for the cost of postage and packing only ($5) if you want it posted to you.
To ensure that we can keep you informed on matters on interest to you please take a minute to update your details here, and to select the information that you would like to receive from us in future.
Click here to update your details.