Tax Assessment Article

Another Professional Trustee in Court

A recent decision of the High Court has again highlighted an amazingly common misconception held by professional trustees that they are not liable for liabilities of a trust.

Or worse, a misguided belief that because they are a ‘passive’ trustee and the ‘family’ run the trust any liability should not fall on the professional. Such beliefs and understandings are not part of the concept of trusteeship.

We say it again – trustees are personally liable for the liabilities of a trust. Trustees have a right
of indemnity to pay the liabilities from the assets of the trust but if the assets are insufficient or the trustee has lost the right of

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indemnity then the trustee pays from his own money.

We can’t be clearer than that!

The issue recently before the High Court involved a lawyer who was an “uninvolved” trustee of a trust.

Trust tax and GST returns were not filed and default assessments were issued. The default assessments were neither disputed nor the tax paid.

The settlor/trustee left the country and penalties and interest accrued. Inland Revenue eventually (after more than 4 years (which we find despicable)) started chasing the lawyer for more than $500,000. He eventually settled with Inland Revenue and personally paid $200,000 in full settlement of the debt.

The lawyer then sued the settlor/co-trustee for the full $200,000 on the basis that:

  1. He had chased him to settle the debt with IRD
  2. He was a “passive” trustee and should not be liable

A trustee can be held to be 100% liable for a liability of a trust but only in a circumstance where it can be shown there was a breach of trust in the form of personal benefit, fraud or where the trustee has improperly benefited

as a beneficiary and none of these applied.

As for the lawyer being a “passive” trustee, the judge simply pointed to case law going back over 200 years and said there is no such distinction as “passive” v “active”. A trustee is a trustee is a trustee and is accountable for the administration of the trust.

As a result, Katz J ruled that the lawyer would be awarded judgment for half of the amount he paid to Inland Revenue plus half of the legal costs incurred plus interest.

This could be a pyrrhic victory as the trick will be to recover the money from the absconded trustee.

The message is clear

While there has been a (surprisingly) lack of action in the Courts in relation to recovering trust debts from trustees – things are hotting up. Sadly, trustees will lose every time.

The Courts will not protect trustees from liabilities properly incurred. Insurance companies will not cover trustees for personal liabilities which (for example) is what a tax debt is.

Let the trustee beware!


Budget 2013 “Mean tax” a stupid tax!

In keeping with recent trends Budget 2013 contained little in the way of tax measures. So much so that we did not see the need for our traditional Budget News Flash clogging your Inbox.

The changes announced were:

  • immediate deductibility for costs incurred in applying for patent or plant variety rights where no depreciable asset is recognised for tax purposes
  • making further fixed-life resource consents granted under the Resource Management Act 1991 depreciable
  • making expenditure incurred on resource consent applications that are abandoned deductible
  • this one may surprise you – making the costs of paying a dividend by a company deductible
  • making the annual fees for listing on the stock exchange deductible (initial listing costs remain non deductible), and
  • this one may surprise also you – making the costs of company AGM’s deductible, (but the costs of special shareholder meetings non-deductible).

The Government is enjoying the fruits of Inland Revenue labours in investigating land subdivisions and so for the 4th year in a row has increased funding for Inland Revenue to do more audits.

Finally, students don’t like it but if they move overseas and don’t make student loan repayments and then return to New Zealand for a mates wedding they may be stopped leaving again until they pay!

In Budget 2012 the Government repealed the “Child” rebate (or tax credit) to be technically correct. The move was “condemned” as being mean spirited.

We condemn it as being yet another example of tax policy stupidity and complexity!

While the tax credit was repealed it was replaced with a tax exemption.

Under the exemption school children are exempt from tax on income that is not PAYE wages, interest, dividends
and foreign sourced passive income PROVIDED THAT their total income is less than $2,340.

This means that school children who are “self-employed” (the baby sitter) or receive non-passive income from a trust do not pay tax on that income provided that their total income is less than $2,340. If their total income is greater than $2,340 they pay tax on all income.

In the meantime, a child receiving wages pays tax from the first dollar of wage received.

Where you act for a trust then, some child beneficiaries will be taxable and some will not.

Did you know….

  • 6% of registered individual NZ taxpayers pay 37% of the personal tax paid in NZ
  • 40% of registered individual NZ taxpayers pay 6% of the personal tax paid in NZ
  • 8% of registered individual NZ taxpayers pay no personal tax
  • A $1 increase in National Superannuation costs $35,000,000

And what about the lawns?….
…a very good question! A house owner who gets the child next door to mow the lawns should be deducting 20% “withholding tax” (PAYE) from the $20 for mowing the lawn and paying it to IRD as the lawn mowing cost is a scheduler payment.

As the lawn mowing cost is a scheduler payment subject to PAYE it does not qualify for the exemption.

Every householder who pays the neighbours child to mow the lawns should now be registered as an employer! It didn’t matter prior to 1 April 2012 because of the Child tax credit – now it should.

Inland Revenue has not picked up on this. In fact the IRD Guide refers to child’s wages from mowing lawns as meeting the (limited) tax exemption.

Legally however, every householder who pays the neighbours child to mow the lawns is committing an offence for failing to deduct and account for PAYE! Stupid!

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