10. Miscellaneous matters
Trust Account Guidelines contents
Client bank accounts
10.1 The power to operate a client’s bank account will generally take the form of powers of attorney, trusteeships or signing authorities with access to chequebooks or equivalent.
10.2 Where in the course of practice you are administering a client’s bank account, you must account properly to that client and keep records to the same standard as required in respect of other trust money (ss110(3)(b), 110(1), 111(1), 112(1)(a) of the Act; Regulation 11).
Nominee companies and contributory mortgages
10.3 If you operate a nominee company, you must comply with the LNCR.
10.4 You must also comply with the relevant Rules and the Regulations where you receive money from a client for investment on contributory securities.
Investments under s322 of the Act
10.5 Client money held by a practice in a trust account or in an IBD (either on call or for a fixed term), unaccompanied by any specific or discretionary investment instruction, will not be within the exclusion of s322 of the Act but will remain covered by the Lawyers’ Fidelity Fund. However, client money held by a practice in a trust account or in an IBD (either on call or for a fixed term) subject to an instruction to invest the money in some "other" investment will be excluded from cover by the Lawyers’ Fidelity Fund unless the instruction relates to a loan agreement covered by s322(3)(b), a conveyancing transaction covered by s322(3)(c) or one of the situations described in s322(4). Examples of investment instructions that would take funds outside the cover of the Lawyers’ Fidelity Fund would be instructions to purchase shares on the stock market (ie, other than an agreement for the sale and purchase of a business, which is within the definition of conveyance under s322(6)(a)(iii)), to place moneys with a finance company or to purchase an annuity.
If you are instructed to invest money within the meaning of s322, you will then be obliged under RCCC 3.4(c) to advise the client in writing that the money will not be covered by the Lawyers’ Fidelity Fund.
Estates and Trusts
10.6 You must administer estate and trust monies in accordance with the will, letters of administration, trust deed and directions of the trustees, executors or administrators. Any investment must be authorised by them. You must provide a statement of all trust money handled for the estate or trust at least every 12 months to the executors or trustees and, where appropriate, to the life tenant and residuary beneficiaries of an estate (Regulation 12(7)). It will be appropriate to report to beneficiaries where so instructed by the trustees or where you are a solicitor trustee of an estate. You should advise residuary beneficiaries of estates, without undue delay after probate, that they are beneficiaries, with an indication of how long the process is likely to take before distribution. Note that failure to report regularly to trustees or beneficiaries, and unexplained delays in administration, are among the most frequent causes of complaints against lawyers.
10.7 Ledgers for estates and trusts should be opened in the name of the relevant estate or trust, not in the names of the individual trustees.
10.8 The LNCR prohibit lawyer trustees and lawyer attorneys from authorising investments in a nominee company or in contributory securities unless the authority is also signed by an independent person who is not a lawyer as defined by those rules and who has authority to make the investment.
Personal transactions
10.9 Regulation 8 prohibits the use of the trust account for your (or your families' or employees') personal transactions. The exception is in property or investment transactions, which are dealt with as if for a client.
Withholding tax on interest
10.10 Where you invest funds as nominee for your clients, you may be obliged to deduct Resident Withholding Tax (RWT) from interest payments received on behalf of, or paid to, those clients. Inland Revenue has issued a booklet entitled RWT on Interest - Payer's Guide (IR 283).
10.11 As agent, you must deduct RWT from interest you receive on behalf of your client unless the client holds a certificate of exemption or unless the payer of the interest has already deducted the correct amount of RWT.
10.12 The correct RWT treatment depends on which of the parties hold certificates of exemption. Unless your client is a registered bank, a building society, a company formed under the Trustee Bank Restructuring Act, the Public Trust (including a wholly owned subsidiary), the Maori Trustee or a trustee company, you should sight a copy of the exemption certificate and take reasonable steps to confirm that the person is the person named in the certificate.
10.13 In all cases the certificate cannot be relied on if: there has been a notice in the Gazette, more than five days previously, cancelling the certificate or you have grounds for believing the person is not eligible to hold a certificate of exemption.
Dealing with RWT deducted
10.14 Where you have deducted RWT from an amount of interest received on behalf of a client, you must pay that RWT to Inland Revenue by the due date.
10.15 Pending payment to Inland Revenue, deducted RWT must be credited to an account within the trust account labelled "Resident Withholding Tax Deduction Account" or similar. These funds can be placed in an interest bearing account forming part of your trust account. You may apply the interest earned in paying your reasonable costs of complying with the RWT rules. The IRD number used should be the same as for other RWT deducted from interest income of the practice. Thus your practice will have the benefit of the tax credit.
10.16 An invoice for your reasonable costs of complying with the RWT rules (the amount of the interest) is delivered in compliance with Regulation 9 if it is prepared, processed and the original placed on your RWT file.
Payments of interest to non-residents
10.17 You must deduct Non-Resident Withholding Tax from interest payments to non-residents in all cases except where the approved issuer levy regime applies. Inland Revenue has issued booklets on NRWT (IR 291) and Approved Issuer Levy (IR 395), which deal with payments to non-residents.
Attorneys for sole practices
10.18 Pursuant to s44 of the Act, sole practices are required to complete a power of attorney on the prescribed form, within three months of commencing sole practice. An attorney and an alternate are required. The form is available from the NZLS. You should obtain the prior consent of your proposed attorney and alternate and advise the NZLS accordingly.
10.19 Whenever a s44 power of attorney is exercised, the donee becomes a Trust Account Supervisor in terms of Regulation 16 and must be qualified as such. Lawyers who are donees and not so qualified should consider taking the Trust Account Supervisor course as a precaution. Refer here for guidance for donees.
10.20 Lawyers who regularly act as locum for sole practices are acting under s44 of the Act. They should obtain powers of attorney in these situations and should have passed the Trust Account Supervisor course. That course will help equip attorneys for the variety of duties and problems they may encounter.
Foreign currency in the trust account
10.21 It is feasible for a practice to set up a foreign currency trust account to receive (say) 10 million Japanese yen and retain the funds in that currency on instructions from the client.
10.22 Banks in New Zealand can open a foreign currency account at a branch in New Zealand. Section 110(1)(a) of the Act requires client money to be “paid into a bank in New Zealand to a general or separate trust account” (of the practice).
10.23 The key points to observe are:
- If not opened as a client bank account (refer guideline 10.1), each foreign currency trust account must be part of the general designated trust bank account arrangements at a bank in New Zealand. Therefore a separate trust ledger account will be opened for each currency held for each client.
- Bank statements must be obtained for each foreign currency trust account and be retained in the trust account records.
- Most leading trust accounting software packages will allow separate cash books to be produced for Bank One, Bank Two, Bank Three, etc. Accordingly, if Bank Three is a foreign currency trust account, the bank reconciliation process is achieved in the normal way.
- Depending on the features provided by the accounting system, it might be necessary to split the trust ledger into sections reflecting the different currencies. Then, for example, the ledger accounts reflecting $US holdings will match the record of the $US bank account.
10.24 Some currencies such as Japanese yen will involve such large numbers of digits that you will need to check whether the software will cope with it. If not, there is always the alternative of keeping manual records for that currency.
10.25 The duty to earn interest on trust account balances (refer s114 of the Act) applies equally to foreign currency balances. However, the rates of interest available on those currencies, and the administrative requirements, will vary markedly from New Zealand currency. In terms of s114(b), earning interest may not be “reasonable or practicable” unless the amounts involved are large or are to be held for a long period.
10.26 It may not be possible to make payments by cheque. This will depend on the banking arrangements, but in practice it may be convenient to arrange with the bank to make electronic payments (authorised by trust cheque signatories) and to record these as entries in the trust account records in the normal way.
10.27 All the normal trust accounting requirements, including authorities for payment, duty to keep proper records and the like, apply in the same way as to New Zealand currency trust accounts.