8.5We noted in the Fifth Issues Paper that it was difficult to ascertain empirically the incidence of trading trusts at present in New Zealand, as the status of a company acting as a trustee is not required to be disclosed or recorded. Previous Law Commission work in 2002 identified the use of trading trusts as growing but not widespread. Accordingly we asked submitters about whether they thought that trading trusts were now in widespread use and whether there were actual problems resulting from their use.
8.8Particular issues arising in various areas are addressed in each section below, but one initial question is whether any reforms need to be targeted specifically at “trading trusts”, as the term is commonly used, to refer to structures involving an assetless corporate trustee that is engaged in business activity; and therefore whether a legislative definition of this term is required.
8.10Only two submitters supported the term “trading trust” being defined in new legislation: KPMG and Taylor Grant Tesiram both favoured the approach in option (b) above. The NZLS supported this definition as a starting point, if a definition was considered necessary, but considered that the prevailing notion of the concept was generally sufficiently understood. Moreover, they observed that it would be difficult to define the term helpfully, due to the different meanings it is given, including in the rural context, due to the need to accommodate and exclude certain vehicles like passive investment trusts.
8.11Remaining submitters considered that “trading trusts” should not be singled out as a subset of trusts. Chapman Tripp considered that a definition was not required as the issues and risks that arise in relation to such trusts are the same as those that arise for any trust that contracts with third parties. Perpetual, the Trustee Corporations Association and Greg Kelly Law said rather than using the popular term “trading trusts”, it would be better for the legislation to state that certain provisions apply to any corporation (other than an incorporated charitable trust board or one of the trustee corporations recognised by statute) which acts as trustee.
8.12We acknowledge that there would be some difficulties in formulating an appropriate definition of a trading trust, especially since the term can have several meanings, so its use could be misleading or confusing. We are also persuaded that the issues raised will often concern a company that is acting as a trustee, if it is transacting with third parties, regardless of whether it is actively “in business”. Therefore we propose that our general approach in this area should be that reforms would apply to any corporate acting as a trustee of a trust. We also consider that the reforms should also generally apply to the statutory trustee corporations, unless they are expressly exempted. However, as needed, we will address the application or scope of reforms in each area as this may need to vary depending on the nature of the proposed reform and its intended object.