Contents

Chapter 15
Regulation

Registration of trusts

Proposal
P55 A system of registration for trusts should not be introduced.
Please give us your views on this proposal.

Current law

15.4At present there is little registration of trusts in New Zealand. Incorporated charitable trusts are required to be registered. Charities can register under the Charities Act 2005. Foreign trusts must be registered with the Inland Revenue regardless of whether they derive taxable income or not.335  However, there is no register for standard inter vivos or testamentary trusts. In respect of incorporated charitable trust boards, registration is the process that establishes such a trust board as a corporate body. As trusts otherwise do not have legal personality, there is not the same necessity for a registration system to establish legal personality.

15.5There are also no external reporting requirements for trusts other than the requirement for income earning trusts to submit a tax return to the Inland Revenue. Up until 1 October 2011, those making gifts of in excess of $12,000, including settlors gifting to private trusts, had to submit an annual gifting return to the Inland Revenue indicating how much had been given in order to be assessed for gift duty. This included settlors that were gradually gifting to the trust the value of the settlement of trust property at a rate that was under the threshold for gift duty. This created a de facto reporting requirement for a number of trusts. Gift duty has now been abolished. New legislation provides some requirements for trust service providers to obtain, verify and retain records of the beneficial ownership and control of trusts.

Issues

15.6In the Fifth Issues Paper we raised the option of requiring trusts to be registered.336  This has been suggested to us as a way of attempting to make more information about general trust use and about individual trusts available. Because trusts are private there are few official requirements that alert the government or the public to the existence of the trust. The government has limited information about the use of trusts generally in New Zealand and about features of individual trusts that may be relevant to applications for government assistance. It can sometimes be difficult for third parties to determine that they are actually contracting with a trustee rather than a beneficial owner. The requirements for the administration of trusts are obligations owed only to the beneficiaries. There is no official body that has the responsibility and access to information to ensure that trusts are being properly administered. A register of trusts had been suggested by members of the public and media, as a way of officialising trusts and making them more transparent. Compared with the registration and reporting requirements for companies, the absence of a register for trusts means it is comparatively easy for trusts to be established, administered and altered, and for property ownership in trusts to be flexible.

Options for reform

15.7The options regarding registration we considered were:
(a)retaining the status quo of no statutory registration or reporting requirements for trusts (other than existing requirements for income earning trusts, charitable trusts and foreign trusts); or
(b)introducing a register for trusts. Various forms of register were suggested, such as a closed register, a searchable public register and a register for trading trusts only.

15.8The Inland Revenue has suggested the option of a voluntary register for trading trusts or trusts operating a business. This option would tie in to a requirement for the trustees of these trusts to disclose that they are managing the trust in the capacity of trustee. Registration on this register could be considered sufficient disclosure, whereas trustees that did not register would be required to prove that the trust existed and that they had met more onerous disclosure obligations to creditors.

Discussion

15.9It is possible that a register of trusts could have some advantages, the nature of which would be dependent on the amount of information that must be submitted and who is able to access this information once it is registered. By incorporating a regulatory element into the process for establishing a trust, there could be greater opportunity to provide information to trustees to ensure that they understand their obligations. A register could mean more information is available about the number of trusts in existence and how they are being used. Government agencies, beneficiaries and potential creditors would all be likely to gain benefit from having information available about trust relationships. Registration and reporting requirements may be an additional tool to ensure that trustees retain the information they are required to in order to meet their duties as trustees.

15.10However, a register would significantly alter the nature of trusts by giving them a publicly registered status. We consider that the potential benefits are not sufficient to warrant such a change. It is also questionable whether the potential problems are valid and whether a register is the best way of addressing these problems. Furthermore, there are considerable disadvantages to the option of introducing a register. The costs of establishing and maintaining a register are likely to be large. It would be difficult to enforce the regulation of the hundreds of thousands of existing trusts. The reduced privacy, confidentiality and anonymity of trusts could make trusts less attractive and shift demand to alternative private structures to meet this need. The comparison with companies does indicate that trusts are comparatively less regulated as companies must be registered, have the names and addresses of directors and shareholders recorded, and make company constitutions and other documents available on a publicly searchable register. Several submitters noted that the nature of companies is that public registration is required in order establish their legal personality, however, something that is not applicable to trusts.

15.11Most submitters were opposed to the introduction of a register. Ernst & Young considered that a register would result in increased compliance costs, particularly because it would require regular updating, and departure from overseas and historical norms with little advantage to be gained. It suggested that if there is a problem with ownership as trustee not being noted on share registries or the land transfer registry then these should be required to show where someone owns as trustee rather than changing trust requirements. The Trustee Corporations Association and Greg Kelly Law made the point that foreign trusts may not be settled in New Zealand if trusts become less private, something which may not be in the country’s interests. Taylor Grant Tesiram’s view was that concerns about the administration of trusts should be addressed by beneficiaries directly by taking court proceedings against a trustee. The New Zealand Law Society’s (NZLS) view was that trusts are private matters and it is up to parties contracting with them to enquire into what relationships are in place. The Inland Revenue was favourable towards the introduction of a register. It considered that the value of privacy in trusts must be balanced against the rights of creditors to know who they are dealing with in a commercial world. Its view was that in an open market economy like New Zealand’s the default position should be transparency in relation to business or asset holding entities unless there is a good reason why this should not be the case. It considered that compliance costs could be reduced by utilising an existing register, such as the Companies Register.

15.12We have considered the option of a voluntary register as a part of a group of measures to address trusts that have a corporate as a trustee in order to encourage disclosure of status as a trustee. Such a register would not apply to most trusts but could increase the transparency of some business or estate holding entities where this would be useful. We are keen to avoid adding a regulatory requirement to the long-established general requirements for creating a trust as trusts have traditionally been able to be created privately and flexibly. A voluntary register would only be effective if there were incentives for trustees to register information about the trust. If corporate trustees were required to disclose their status as trustees in some way, a voluntary register could provide a straightforward method for them to disclose. An incentive suggested by Inland Revenue was that registration could be deemed to provide evidence of the existence of a trust and the onus would not be on the trustees to prove its existence, the date it was settled, the parties and the assets held. However, in chapter 8 we propose an alternative method for corporate trustees to disclose their status as trustees (see P33), along with other proposals to address the issues that arise with these types of trusts. We do not consider it necessary to proceed further with consideration of a voluntary register at this stage.

335Resident trustees of a foreign trust must disclose the name or other identifying particular (such as the date of settlement of the trust), the name and contact details of resident foreign trustees, and details of membership of trustees in approved professional organisations.
336Fifth Issues Paper, above n 334, at ch 9.