CRS and corporate trustees in New Zealand

The Common Reporting Standard (CRS) is a global initiative by which the governments of virtually every country have agreed to cooperate in the detection and prevention of tax evasion by exchanging information about financial assets held for individuals in financial institutions in each country. If a financial institution in one country holds financial assets for a resident of another then information about the account and the people who control the account will be exchanged between the tax authorities of the relevant countries.

One of the conceptually challenging things about CRS is that it captures trusts, companies and other entities because, it is perceived, they are sometimes used by individuals to avoid or evade tax. Another challenging aspect of the regime is that there may be obligations, even where there is no foreign element to the arrangements.

CRS is now part of New Zealand law and non-compliance may result in penalties being imposed under the Tax Administration Act 1994. Furthermore, banking facilities may become compromised as the banks, in particular, are taking compliance very seriously.

Among other criteria, the CRS provides that an entity (eg, a trust, company, etc) will be a “financial institution” if it is “in business” as such (eg, a bank or trust company) or “managed by” such an “in business” financial institution. So it follows that a trust and corporate trustee administered by a bank or trust company is likely to be a “financial institution” for CRS purposes.

IRD’s interpretation of how corporate trustees should be treated in NZ

In May 2018 the New Zealand Inland Revenue Department (IRD) released new Guidance Notes setting out its view as to when corporate trustees (and trusts) will be financial institutions for CRS purposes. The Guidance Notes are intended to clarify the application of the CRS to corporate trustees who operate within a professional group (eg, law and accounting firms) to provide fiduciary and administrative services to trusts set up by and for clients of those professional firms. It has been the subject of robust discussion by those interested in this area as to what, if any, CRS obligations exist for such a corporate trustee.

A New Zealand law or accounting firm will not typically be a “financial institution” for CRS purposes. Therefore, in this author’s view, trusts administered by a New Zealand law or accounting firm would not ordinarily be caught by the “managed by” test. IRD disagrees and justifies its position by “attributing” income received by the law firm in connection with the trust to the corporate trustee and therefore deems the corporate trustee to be an “in business” financial institution.

In my view, there is no basis in New Zealand law which allows the attribution of income between entities in these circumstances. Or if there is one, I have not found or been directed to it.

How corporate trustees are treated in other countries

IRD appears to support its position by looking to how corporate trustees (usually referred to overseas as PTCs or private trust companies) are treated in other countries.

In my view, the UK, Hong Kong, Singapore and the “offshore” jurisdictions are materially different to New Zealand. In those jurisdictions trusts are typically used by the wealthy, for the vulnerable, or for commercial purposes. Such trusts are usually governed independently by a licensed and regulated financial institution (eg, a bank or professional trust company). Or, if not, then the trustees are likely to be individuals rather than a corporate trustee (eg, the Grosvenor Estate and other landed estates in the UK). Those individuals exercise the functions of their office independent of any profession.

Why New Zealand is different

On the other hand, trusts are ubiquitous in New Zealand and often contain as many liabilities as they do assets. Over many years practising overseas and advising on many hundreds of trusts, I struggle to recall a foreign bank ever lending into a standalone family trust for the purpose of acquiring the initial property. However, that is an everyday retail banking transaction in New Zealand. Whilst that modus operandi is peculiar in a global context, it is what it is.

Typically corporate trustees in other countries will be “managed by” a financial institution (eg, a bank or trust company) and a clear distinction will be made between advice and governance. A foreign law firm may have an associated trust company but, in my experience, will engage with it on an arm’s length basis pursuant to terms of engagement when giving legal advice. Such a trust company will be a business unit in its own right. In New Zealand the provision of legal advice and fiduciary services is typically conflated and the latter is not a regulated (or possibly even valued) activity.

In summary, the New Zealand domestic trust environment is quite peculiar but the Guidance Notes do not recognise this. Furthermore, in the author’s view, there is little to be gained by New Zealand adopting an attribution test of this nature. Corporate trustees administered by a financial institution (eg, Perpetual Guardian, Public Trust, etc) will be caught in any event. Corporate trustees administered by an active NFE (eg, a law or accounting firm) need not be caught because the underlying trust must still report (if it is a financial institution) or self-certify to its bank (if it is a passive NFE). There appears to be no greater opportunity for tax avoidance were the IRD to agree with the author.

Another reason why some offshore jurisdictions may treat corporate trustees this way is to prevent tax avoidance by trusts banking assets in the US (a non-CRS participating jurisdiction). If the corporate trustee could avoid being a financial institution in this way then any financial reporting on such a trust might be avoided. However, I have seen no evidence whatsoever of that happening in a New Zealand domestic context.

The road ahead

CRS is part of a paradigm shift in the ways laws are being enforced globally. Another example is the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 which also imposes significant compliance obligations on trusts and trustees. Essentially, governments, tax authorities and law enforcement agencies are shifting the burden of enforcing laws on to financial institutions, professionals and other businesses who service their residents. These laudable objectives are being achieved by imposing legal obligations and significant penalties for non-compliance on the business sector.

In fairness, IRD is in a difficult position because consistent application of these global compliance regimes is essential to their success. IRD has formed its view and it would be a bold director of a corporate trustee who takes a different position – albeit the Guidance Notes are not law nor binding.

The practical consequence is that governance and administration of trusts with corporate trustees has just become more complicated in New Zealand. This is largely a result of our traditional approach to asset planning being quite peculiar in a global context. It may be an opportune time to review existing trust arrangements. Some law and accounting firms may even consider reverting to personal trusteeships.

The silver lining may be that the provision of fiduciary services in New Zealand eventually becomes recognised as an independent and valued profession in its own right and greater emphasis is placed on the governance and administration of trusts. If that happens then these compliance obligations may in fact be a blessing in disguise. We now practise in a world where sound governance and polished administration is more important than clever planning.

Henry Brandts-Giesen henry.giesen@kensingtonswan.com is a partner at Kensington Swan’s Auckland office where he heads the private wealth team.