New Zealand Law Society - Amendments to the Unclaimed Money Act 1971 What this means for lawyers’ trust accounts

Amendments to the Unclaimed Money Act 1971 What this means for lawyers’ trust accounts

Introduction of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 has caused changes to the Unclaimed Money Act 1971 (UCM). Namely in how unclaimed money is reported and transferred to the Commissioner of Inland Revenue.

Changes to the UCM Act

The amendments modernise the unclaimed money regime with the aim of simplifying the process of reporting and transferring unclaimed money to the Commissioner of Inland Revenue. It appears the primary audience of the reforms is banks and similar institutions that hold extensive numbers of accounts and regularly have tranches of accounts that are identified as aged, inactive or otherwise bearing the hallmarks of abandonment.

The reforms to the UCM Act include the following:

  • Reducing the amount of time which must pass before money is deemed unclaimed, by replacing the previous deeming periods of 6 and 25 years with a single period of five years for all funds (please note, there is no requirement for practitioners to hold funds for a specific period of time as there is for other holders of unclaimed money, per sub sections 337(2)-(4) of the Lawyers and Conveyancers Act 2006).
  • Allowing holders, in limited circumstances, to transfer money to the Commissioner before it is unclaimed.
  • The repeal of the requirement for a holder to keep and maintain a register of unclaimed money.

Amounts of $100 or less are not ‘unclaimed money’ for the purposes of the UCM Act. However, the UCM Act retains the alternative use provision in place under the previous UCM Act, which allows fund holders to transfer amounts of $100 or less to the Commissioner as unclaimed money. Holders have a choice between paying these amounts to the Commissioner or putting them to another purpose (such as donating them to charity). Money applied for the benefit of the holder, or another use, will cease to be unclaimed money. However, this does not affect any claim that the owner of the money may have against the holder for repayment.

Transfer of money to the Commissioner before it becomes unclaimed (section 4(3)(b) of the UCM Act)

Historically there was no ability for holders to pay unclaimed money to the Commissioner before the expiry of the six or 25-year holding periods specified under the previous regime.

In some circumstances, however, Inland Revenue appreciates that there is little to be gained by requiring holders to retain amounts owed to former clients where they have identified that the owner is unable to be contacted.

To assist holders, section 4(3)(b) allows holders to choose to pay money which has not yet become unclaimed to the Commissioner where they have made reasonable efforts under section 5B and have been unsuccessful in locating the owner. There is no requirement that a holder first contact the Commissioner before transferring such money to Inland Revenue.

The reforms require a holder to make “reasonable efforts” to locate an owner of unclaimed money.

The obligation on a holder to make reasonable efforts is intended to encourage holders to use their resources and the information they hold efficiently. This is a move away from the formalistic process for contacting owners prescribed by the previous legislation. Holders are required to pursue the avenues of contact which they consider will be most productive. This will require holders to exercise reasonable judgement.

Information which holders should provide to the Commissioner includes (in summary):

  • how the money came to the holder
  • the identity and whereabouts of the owner (if known)
  • why the money belongs to the owner, and
  • any identifying data (for example, the owner’s IRD number).

Inland Revenue will provide holders with an electronic template to facilitate the transfer of relevant information from the holder to Inland Revenue. To use the template, holders will need to register as a holder in myIR and submit their schedule online.

The reforms make three categories of money received or held by the Commissioner unclaimable. These are amounts which:

  • have been unclaimed for 25 years or more
  • have no identifying information, or
  • are $100 or less.

Amounts that fall within these categories are removed from the list of unclaimed money by the Commissioner and may not be claimed by their owners. In each case, these amounts cease to be unclaimed money when they meet the requirements for delisting by the Commissioner. The Crown becomes the owner of this money.

Application to law practices

Lawyers have been encouraged to refund unneeded monies that sometimes arise, eg residuum balances in conveyancing transactions. Guideline 9.7 & 9.9 states that

“Unless otherwise directed, you have a duty to pay to the client any balance of money held after the

task for which it was held has been completed. The procedure for reporting to the client and closing

the file will normally include paying out any balance (Section 110(1)(b) of the Act; Regulation 12(7)).

Part of the rationale for regular reporting as required by Regulation 12(7) is that the client is reminded of the monies and instructions remain or are refreshed. In some instances, a client can move address (or change email address) and through no fault of your own you lose contact with your client. If that occurs, you should make every possible endeavour to locate them. You will need to meet the costs of such efforts.”

“A practice should regularly review long standing balances, question the reasons for ongoing retention and ensure that reporting is being completed. Where you cannot find a person on whose behalf you are holding trust money, and you do not have authority to pay the money to any other person, you may follow the procedure set out in Section 337(2) – (4) of the Act (Payment to Inland Revenue). Remaining money for a company may be forwarded to Unclaimed Monies, The Public Trust CSC Accounting, PO Box 31543, Lower Hutt, 5010. The Public Trust is to be notified of the company details and a statement that the funds are to be credited to the Liquidation Surplus Account under Section 324 of the Companies Act 1993.

The NZLS recommends that any trust account balance left over is dealt with promptly so as to avoid such situations.”

There will be some firms that have accumulated some unaddressed monies and have not been making the required efforts to report and liaise with the owners of those monies. Those firms will need to complete their efforts to resolve such monies, and this is a facet of administration that the Inspectorate checks. In most instances if the issue has been raised before the Inspectorate will require the firm to remedy and rectify it promptly, and consider referring the matter to a Standards Committee. The LCRO decision LCRO 319/2012 reversed a Standards Committee decision and made findings of unsatisfactory conduct in respect of a failure to address stale balances and to report no less than annually to clients, for all the partners of the firm. The gist of that decision is that reporting is a strict duty and omission is not to be taken lightly.

Given the fiduciary duties a lawyer owes to his/her clients, the efforts to locate a client should be considerable, especially if the loss of contact is attributable, even in part, to the lawyer’s failure to complete their reporting under reg 12(7).

The Trusts Act 2019 applies in that trustees have a duty to locate beneficiaries and this raises a similar approach of “reasonable measures” (s136). Hodgson v Hodgson CIV-2021-485-155 [2021] NZHC 906 found that traditional strategies such as newspaper advertisements may be insufficient, and social media and commissioning private investigators may have more relevance and application.

The remaining discussion assumes that lawyers have met their duty, in terms of reasonable measures and efforts, to locate their client.

The question falls into two parts; firstly, what lawyers should now do with unclaimed amounts under $100, and secondly what they should do with those unclaimed amounts $100 and over.

Balances under $100

The UCM Act allows fund holders to transfer amounts of $100 or less to the Commissioner as unclaimed money. Holders have a choice between paying these amounts to the Commissioner or putting them to another purpose (such as donating them to charity). Money applied for the benefit of the holder, or another use, will cease to be unclaimed money. However, this does not affect any claim that the owner of the money may have against the holder for repayment. Amounts which are retained by a holder which are not unclaimed money will be income in the hands of the fund holder.

Application to law practices

Some firms capture a pragmatic authority in their engagement materials that, should they be unable to locate their client, the client authorises them to pay any uneconomic balance (usually under $20) to a named charity. Such authorities conform with s110 of the Lawyers and Conveyancers Act 2006 and are unlikely to be disturbed by these UCM changes.

Whilst the UCM may provide for fundholders to amounts of $100 or less it is doubtful that lawyers will be able to enjoy such windfalls (arguments of undue enrichment and conflict arise from the wealth of case law on this topic). It is expected that lawyers holding orphaned monies will pay them to the Commissioner as unclaimed money. Should a claimant emerge after divestment, the firm should be able to evidence their having met their reporting duties, and reasonable efforts, if they are to avoid having to recompense the client.

Balances $100 and above

The key difference here is that these monies are recoverable from the Commissioner if the owner subsequently presents and is able to evidence their claim.  It is expected that the firm will furnish the Commissioner with as much information as necessary (subject to client confidentiality) to accommodate any subsequent presentation and claim. The efforts taken to locate the client are expected to be commensurate with the quantum, and again further increased if there is any element of lawyer negligence/omission.

Paying monies to the Commissioner

Money for an individual may be forwarded electronically to Inland Revenue via your “myIR” portal login. IRD has more information changes on the processes on its website.

As noted above, there is no requirement for practitioners to hold funds for a specific period of time as there is for other holders of unclaimed money.

In summary practitioners should:

  • Regularly review all trust account balances and check that all non-current balances* (say older than 3 months) are being retained for valid reasons.
  • Ensure all trust account balances are reported upon to clients at least annually, and follow up any contact failures, eg unacknowledged emails or return-to-sender letters.
  • Clear any accumulation of orphaned monies so you can start with a clean slate and be able to defend any claim of regulatory non-compliance.

* The modern software (practice management) used by most firms can produce reports that will list such balances with ease although some reports for funds earning interest can be misleading and a manual process may be needed.

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