Chapter 9 - Registration and reporting requirements

Why might a register be needed?

Lack of a central repository of information about trusts

It could be considered problematic that there is no official means of recording the existence of a trust.451 A trust is a relationship between a settlor and trustee. But it is a relationship that has specific legal consequences for those involved and for third parties interacting with it. Similar types of legal relationship, such as companies, limited partnerships and incorporated charitable trusts, are required to be publicly registered and acknowledged. There is high per capita trust usage in New Zealand.452 Trusts therefore must be having an impact on the financial situation of a significant proportion of New Zealanders, whether through having their assets transferred to trusts or by being beneficiaries or potential beneficiaries of trusts. Furthermore, a large number of New Zealanders are under obligations as trustees.

Despite this, the Government has little ability to assess even basic information about how trusts are used and how they affect the financial position of those involved. This may hinder the Government’s ability to respond to any problems relating to trusts or their effects and means government policy could result in inefficiencies and unintended consequences. The Ministry of Social Development has expressed its concern about the lack of annual reporting or accounting requirements for trusts and a central repository of knowledge regarding the existence of trusts.453

A requirement to register basic information about a trust would mean information on the numbers of trusts and who was involved in them would be retained. However, anything more substantial than this would require extensive reporting requirements as well.

Lack of transparency

It could be argued that there is a lack of transparency about the existence and use of trusts. Whether a trusts register and reporting requirements can alleviate this depends on the nature of the register and regulations.

Beneficiaries

An issue that has been raised is that some beneficiaries may not know that they are beneficiaries of a trust and they have no ability to find this out.454 Trustees are under a duty to inform beneficiaries of information relating to the trust, including taking reasonably practicable steps to inform beneficiaries of the trusts in their favour.455 Beneficiaries are generally the only persons with standing to challenge the performance of a trustee’s duty and without the beneficiaries having knowledge of the trust there is no one to hold trustees to account.456 However, this concern may not be best addressed by a register. Other options, such as clarifying the trustees’ obligations to inform beneficiaries, are being considered in this review.457

Third parties

Third parties, including potential creditors, may be unaware that they are contracting with trustees as opposed to the legal and beneficial owner or a company. In the case of a trading trust there are no or very few assets with which to meet obligations. A third party may be at greater risk of becoming an unpaid creditor than it realises or has been able to factor in to the risks of the transaction.

Blanchard J commented extrajudicially on the lack of transparency in 2002. He queried whether trustees ought to be required to reveal the existence of the trust. He described the problem thus:458

Where, in my view, the unrevealed trust can mislead is when you are dealing with someone who appears to have assets making them credit worthy but upon bankruptcy is found to be holding them in trust for family members. Trusts are easy to spot when the legal ownership is held by a trust corporation or by several persons whose names include a solicitor or accountant … then you know there is a trust which may be protecting assets. But if I contract with Mr and/or Mrs Bloggs on the strength of their apparent asset position, am I not entitled to think that assets I see vested in their names alone are their beneficial property, not held in trust so as to be unavailable to meet obligations to me?

Blanchard J considered that there was a “misuse of trust law when concealment of this kind is practiced.” A register of trusts is a possible response to this issue, although it relies upon creditors checking the register in order for them to get the information, which would then enable them to seek greater protections and guarantees regarding the transaction with the trust. Chapter 6 raises more direct options for disclosure when a trading trust is contracting with third parties. It is arguable that the responsibility should lie with potential creditors to properly check the nature of the entity with which they are doing business and to take appropriate precautions.

Lack of accountability

Because there is currently no way of obtaining information about individual trusts, there may be a lack of accountability in how trustees are managing trusts. A beneficiary may hold a trustee to account, but in many cases this is unlikely to happen either because beneficiaries are unaware of what the law requires of trustees or because the primary beneficiaries are the settlor, who may also be a trustee, and his or her close family members.

There are certain management requirements trustees should meet, such as keeping account of trust property, recording trustees’ decisions and meeting tax obligations. The beneficiaries may not notice or be concerned about these requirements not being met. However, it may not be in the interest of the public or the Government for trusts to be poorly managed. There are benefits for settlors in transferring their assets to a trust and for beneficiaries in having an interest in trust property. It may result in unfairness if these trusts continue to generate these benefits when the day to day management requirements have not been met. Submitters have expressed concerns about this.459

Currently there is no way of identifying trusts that are not operating as they should unless problems result in litigation. Registration and reporting obligations would only address these problems if a significant amount of information about individual trusts was made publicly available and a process for monitoring compliance and enforcing obligations were established. Such monitoring and enforcement processes would significantly add to costs.

Abolition of gift duty

There is the potential for the abolition of gift duty, from 1 October 2011, to exacerbate any problems with a lack of records of trusts.460 The annual gift duty return meant that where a trust still owed a debt, settlors and trustees had to meet or at least to consider the state of a trust at least once annually in order for settlors to forgive the portion of the debt that the trust continued to owe.461 Gift duty has ensured some documentary record of assets that have been transferred to a trust each year. There is concern that the abolition of gift duty will result in a loss of key information on trusts.462

In the Regulatory Impact Statement on the Taxation (Tax Administration and Remedial Matters) Bill, Inland Revenue noted that the removal of gift duty and its associated compliance costs could be expected to lead to more instances of gifting to trusts, which may in turn lead to an increase in the number of trusts established in New Zealand.463 They commented that there are “broad concerns across government and the private sector regarding the uses of trusts and their lack of regulation” but that these concerns should be dealt with independently of gift duty. They referred to the Law Commission’s review as an opportunity to consider new forms of regulation, such as a central trust register and the compulsory filing of annual trust accounts.464 Submitters have expressed concern about the effect of the repeal of gift duty on trust management and record keeping.465

Assessment of the problem

A number of distinct issues have been raised, which could support a case for further regulation of trusts. It needs to be considered whether these do in fact pose a problem that is in need of reform. There is a perception among some that trusts are causing unfairness in various ways, and that greater transparency about how property is held will reduce the ability of people to “hide” property in trusts and gain advantages because of this. A register has been suggested in answer to this concern. However, it is arguable whether a register would achieve these aims. The extent to which registration and reporting requirements for trusts would address the perceived problems depends on the nature of the register and requirements.

The options for registration are detailed below following a discussion of how trusts are regulated overseas. A minimal register and reporting obligations are unlikely to achieve much, yet more extensive reporting requirements may greatly increase the obligations on trustees and the costs of administering trusts for the sake of only a small number who misuse trusts. The compliance costs of introducing a registration requirement would be high. An annual reporting requirement would mean time and expense for every trust in New Zealand. Fees for registration would be an additional cost. On top of this, the administrative costs for introducing a registration requirement and maintaining a register would be considerable.

Submission of New Zealand Trustee Services on Review of the Law of Trusts in New Zealand: Introductory Issues Paper (submission dated 29 November 2011) at 13.

Law Commission Some Issues with the Use of Trusts in New Zealand: Review of the Law of Trusts – Second Issues Paper (NZLC IP20, 2010) at [2.1]−[2.7].

Submission of Ministry of Social Development on Some Issues with the Use of Trusts in New Zealand: Review of the Law of Trusts – Second Issues Paper (submission dated 22 July 2011).

Submission of Martin Riley, Stirling Tax Services on Some Issues with the Use of Trusts in New Zealand: Review of the Law of Trusts – Second Issues Paper (submission dated 17 June 2011).

See Law Commission The Duties, Office and Powers of a Trustee: The Review of the Law of Trusts – Fourth Issues Paper (NZLC IP20, 2010); David Hayton, Paul Mathews and Charles Mitchell (eds) Underhill and Hayton: Law Relating to Trusts and Trustees (17th ed, LexisNexis Butterworths, Bath, 2006) at [60.10].

Submission of Martin Riley, above n 454.

Law Commission The Duties, Office and Powers of a Trustee: The Review of the Law of Trusts – Fourth Issues Paper (NZLC IP20, 2010) at ch 2.

Peter Blanchard “Towards a modern law of trusts” (paper presented to New Zealand Law Society Trusts Conference, 2001) at 8.

Submission of New Zealand Trustee Services, above n 451.

The Taxation (Tax Administration and Remedial Matters) Act received Royal Assent on 29 August 2011.

See Rob Stock “Gift duty bonus comes at high price”, above n 450.

Ibid.

Inland Revenue RIS – Taxation (Tax Administration and Remedial Matters) Bill < www.taxpolicy.ird.govt.nz > at 18.

Ibid, at 19.

Submission of Vicki Ammundsen, Ayers Legal on Some Issues with the Use of Trusts in New Zealand: Review of the Law of Trusts – Second Issues Paper (submission dated 31 March 2011) at 3. Submission of Ministry of Social Development, above n 453.