Contents

Chapter 1
The trusts context in New Zealand

Why are trusts so popular in New Zealand?

1.23In the Second Issues Paper we asked why there are such a comparatively large number of trusts in New Zealand and submitters were able to give us some useful insights on this question.46
1.24One reason for the popularity of trusts is that there is favourable tax treatment of trusts in New Zealand compared with other jurisdictions, which have tax disincentives. New Zealand now does not have any estate duty, gift duty, stamp duty or capital gains tax. Tax laws in a number of countries effectively discourage the settlement of trusts by imposing high tax rates on trusts.47  In countries where the corporate tax rate is lower than the trust tax rate, companies are likely to be used more frequently than trusts for investments. At times tax rates in New Zealand have been set in such a way that they have effectively encouraged the use of trusts to minimise taxation. For instance, from 2000 until 2010 the highest personal tax rate was 39%, while trust income was taxed at 33%.48

1.25Submitters also pointed to the ease and low costs of establishing and maintaining trusts. There are few compliance requirements associated with operating a trust in New Zealand. The process for settling a trust is generally private and there is no official public record of trusts or ongoing obligation to submit information to a public body.

1.26In recent years there appears to have been active promotion and advocacy for trusts. Some have described this as a “commodification” and “marketing” of trusts by the “trusts industry”. Trusts are sometimes seen as a status symbol, and something that every property owner should have (Ayers Legal described this as the need to “keep up with the neighbours”). While in many countries trusts are seen as a structure for the wealthy only, there is widespread settlement of trusts amongst middle income New Zealanders. KPMG suggested that one reason for this is that New Zealand has relatively high levels of investment in real property and trusts have been promoted as a useful structure for property investment. Ayers Legal submitted that “[i]t is possible that the New Zealand obsession with trusts also represents in part a refusal to accept that trusts are the preserve of the wealthy” and goes on to describe the New Zealand experience as “an egalitarian response to the establishment of trusts”. As the legal and accounting professions have become more familiar with trusts, there has been a tendency to advise the establishment of a trust as “part of the package” when other work is being done.

1.27Another reason posited is that New Zealanders are wary of future changes in government policy, such as changes to tax rates, which could make their financial position uncertain. It has been suggested that maintaining a trust allows taxpayers to have greater flexibility in how they structure their finances. One submitter went as far as directing attention to “the legislative and judicial decision making background that forces ordinary people to have to set up trusts to try and protect themselves, their children and their assets” rather than to any improper use of trusts.49
46Key submissions commenting on why trusts are popular in New Zealand were received from Taylor Grant Tesiram, the Trustee Corporations Association, KPMG, Harris Tate, WHK, the NZLS, Chapman Tripp, Martin Riley, the Auckland District Law Society, Ayers Legal, Peter Kellaway and Lawler & Co.
47For instance, in the United Kingdom, most income over £1,000 accumulated by a trust is taxed at 50% (HM Revenue and Customs “Tax on different types of trust income” <www.hmrc.gov.uk>).
48Second Issues Paper, above n 43, at [2.13].
49Law firm Lawler & Co refers to policies on residential care subsidies, taxation, and relationship property creating the impetus for trusts.