Private Wealth 2021 New Zealand Trends & Developments Mary Joy Simpson, John Kirkwood and Emma Tonkin Hesketh Henry
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Definitive global law guides offering comparative analysis from top-ranked lawyers Private Wealth 2021 New Zealand Trends & Developments Mary Joy Simpson, John Kirkwood and Emma Tonkin Hesketh Henry practiceguides.chambers.com
NEW ZEALAND Trends and Developments
Trends and Developments
Contributed by:
Mary Joy Simpson, John Kirkwood and Emma Tonkin
Hesketh Henry see p.6
Introduction considered by the courts and for the common
In 2020, private wealth professionals in New law to start to develop under the Act.
Zealand had to grapple with the immediate
practicalities of working within the confines of a Housing Crisis and Taxation Changes
COVID-19 environment. A number of new laws The unprecedented levels of world-wide fiscal
were passed to enable business to continue stimulus and the low interest rate environment
while finance was uncertain and in-person meet- continue to have an effect on issues which were
ings could not be held. present in the New Zealand landscape prior to
COVID-19. There is a well-documented housing
In New Zealand, the health outcome has to date shortage in New Zealand, and it continues to a
been relatively successful, due in part to the very high level of unaffordability, particularly for
country’s elimination strategy. This has resulted buyers of first homes in urban areas.
in New Zealand enjoying freedom of movement
within the country with relatively few periods of This is an issue which the current Labour gov-
lockdown. As New Zealanders have returned to ernment is trying to address through a number
a more normal way of living, other factors have of policy levers, including taxation. In line with
overtaken the immediate issues raised by COV- global moves towards greater transparency due
ID-19. to concerns over equality of taxation, trusts are
also coming under increasing scrutiny in New
Trust Act 2019 Zealand. As real estate and trusts are inextrica-
The Trusts Act 2019 has been in force since bly linked in the New Zealand investment land-
January 2021. New Zealanders are getting used scape, changes which affect one inevitably have
to the change in language that the new legisla- an impact on the other.
tion has introduced. Cases relying on the Trusts
Act 2019 (Act) are now beginning to be decided New Tax Administration Act 1994 Provisions
in the courts. New requirements
The most recent of these changes to come into
In a recent case in the High Court of New Zea- force (from 1 April 2021) are changes which
land, Michael Anthony Talijancich & Ors v Lor- require active trusts to file detailed financial
raine Marise Talijancich & Ors [2021] NZHC 753, information with their tax return to the Inland
the trustees of a family trust for a high-profile Revenue Department (IRD).
New Zealand family sought several variations to
the Trust Deed under the Act. The Court consid- From the 2022 tax year (1 April 2021 to 31 March
ered the application of Sections 121–125 of the 2022), trustees will need to file the following.
Act, enabling it to vary the terms of a trust where
there were beneficiaries who were not able to • Financial accounting information, including
act on their own behalf. Although the consid- profit and loss statements, balance sheet
erations were relatively procedural it is helpful items and other information to be specified by
to practitioners for these sections to start to be the Commissioner (of the IRD).
2Trends and Developments NEW ZEALAND
Contributed by: Mary Joy Simpson, John Kirkwood and Emma Tonkin, Hesketh Henry
• Information on distributions and settlements If documenting any settlement or distribution
made during the income year. from 1 April 2021, practitioners are well advised
• In respect of settlements in prior income to collect the necessary information directly from
years, there may be an obligation to dis- the settlor or beneficiary at the time of the trans-
close, as Section 59BA (2)(c) reads “or whose action. This is because chasing the information
details have not previously been supplied to later when tax returns are due may prove dif-
the Commissioner”. ficult. There is also likely to be increased docu-
• The information required for trust settlements mentation around settlements and distributions
will include identifying information for the because the person disclosing the information to
settlor such as their name, country of tax resi- the IRD will be the trustees. It will therefore be
dence, IRD or tax number and date of birth. prudent to have the settlor or beneficiary provide
• The information required for trust distribu- the information in writing, confirm the informa-
tions will include identifying information for tion is true and correct and also acknowledge
beneficiaries such as their name, country of that the information will be disclosed to the tax
tax residence, IRD or tax number and date of authority.
birth.
• Identifying information (country of tax resi- There may also be an obligation to collect this
dence, IRD or tax number and date of birth) information under the OECD’s Common Report-
for each person having a power under the ing Standard (CRS) and if so, such disclosures
trust to appoint or dismiss a trustee, to add should also be acknowledged.
or remove a beneficiary or to amend the trust
deed. Increasing awareness of the source of trust
equity
There is also a wide catch-all provision in Sec- The changes to the Tax Administration Act 1994
tion 59BA(2)(f) – “the other information required will necessitate a change to how trust accounts
by the Commissioner”. As at the date of pub- in New Zealand are prepared. The source of trust
lication (August 2021) the final IRD form has equity is no exception. Trust equity in most New
not been set, so there may be other reporting Zealand trust balance sheets is presented as a
requirements. one or two-line item. This alone tells the trustees
very little about the source of trust equity.
Collection of information
Section 59BAB further provides that the Com- Practitioners in New Zealand who have been
missioner may request information relating to involved with a trust making distributions to an
periods from 1 April 2014. This obligation only offshore beneficiary will know that it is impor-
applies to trusts to which the Section 59BA tant to understand what is being distributed. Is
reporting requirements apply. The information it surplus income? Capital gains? Corpus settled
also has to be in the knowledge, possession or on the trust?
control of the trustee. Therefore, if the Commis-
sioner is requesting information in relation to a The changes to the rules represent an opportu-
distribution to a beneficiary prior to the 2022 tax nity to better reflect the source of trust equity,
year, the trustees may be able to respond that which should be separated into the following five
the necessary information was not collected at key components:
the time of the distribution.
• initial settlement sum;
3NEW ZEALAND Trends and Developments
Contributed by: Mary Joy Simpson, John Kirkwood and Emma Tonkin, Hesketh Henry
• further settlements received; The government has warned that it will be look-
• revaluation reserve (to reflect increases in ing carefully at behaviour resulting in the exploi-
valuation of assets); tation of that difference and that the general
• capital reserve (realised accumulated capital anti-avoidance provisions will apply. The report-
gains); and ing requirements for active trusts under the Tax
• retained earnings (accumulated revenue after Administration Act are one of the “integrity
taxation). measures” that the IRD has adopted. The gov-
ernment has left it open to increase the trust tax
Both trustees and professional advisors to rate to 39% as well if it considers that trusts are
New Zealand trusts will be able to make more being used to divert funds towards trust income
informed decisions relating to distributions and rather than individual income. Some of the work
other trust matters when the source of trust equi- around these measures has not yet been con-
ty is clearly presented and tracked. Distributions cluded as the government also announced fur-
to beneficiaries that are foreign tax residents can ther reform in the taxation of capital gains result-
benefit from clear division of trust equity com- ing from residential housing in April 2021 which
ponents. This information is also extremely use- is designed to further dampen down speculation
ful if there is an analysis of the trust in respect in the housing market.
of claims under the Property (Relationships) Act
1976 for the purposes of a separation. What Extension of the Bright-Line Test
assets have been settled on the trust and when The “bright-line” rules apply to the buying and
did that occur? selling of residential property in New Zealand.
Any uplift in value on the transfer of residential
Non-active trusts property is taxable where the property has been
These reporting requirements will not apply to acquired in one of three periods.
non-active trusts. So, if a trust only holds the fam-
ily home, which does not generate any income, The first period is between 1 October 2015 and
the reporting is not required. The requirements 28 March 2018, where the property is sold with-
also do not apply to foreign trusts, charitable in the two-year bright-line period. The second
trusts and Māori Authorities. Of course, foreign period is between 29 March 2018 and 26 March
trusts have a separate reporting requirement, 2021, where the property is sold within the five-
and it may well be that the form is similar to that year bright-line period.
for a foreign trust annual return.
From 27 March 2021, property which is acquired
New 39% Tax Rate for Individuals and sold within a ten-year bright-line period will
The anticipated consequence from the exten- be captured, subject to certain exemptions. The
sive borrowing required to support the country’s government has indicated that one of those
economy during COVID-19 was an increase in exemptions will be if the property is a “new
the personal tax rate. This has been confirmed build”. In that case the applicable bright-line
and from 1 April 2021 individuals who earn over period will still be five years. However, the defi-
NZD180,000 are required to pay income tax on nition of a “new build” has not yet been finalised
the amount exceeding that sum at a rate of 39%. and is currently under consultation. Generally, it
is proposed that residential property would be
This leaves a gap between the trustee tax rate considered a new build if it is a self-contained
of 33% and the individual top tax rate of 39%. dwelling (ie, with its own kitchen and bathroom,
4Trends and Developments NEW ZEALAND
Contributed by: Mary Joy Simpson, John Kirkwood and Emma Tonkin, Hesketh Henry
and one that has received a code compliance The new rules are proposed to apply to the fol-
certificate). lowing taxpayers using loans to acquire residen-
tial property:
The bright-line rules impact on residential prop-
erty held through a trust because a transfer from • trusts, partnerships and limited partnerships;
one trust to another (or to an individual) gen- • close companies (where five or fewer people
erally resets the bright-line period. The change own more than 50% of the company), includ-
from five to ten years has given trustees more ing look-through companies; and
pause for thought when considering whether to • any company where residential property
restructure trusts which hold residential prop- makes up more than 50% of its assets and
erty that is not the main home of the settlor. In individuals.
New Zealand, many people hold second or third
homes through a trust which would not qualify The change to the interest deductibility rules is
as a main home. currently under consultation.
A home property held in trust may qualify for the Conclusion
main home exemption, but only if the persons The impact of COVID-19 and the changes to
residing in the property are also the main settlors government policy to try and ensure a stable
of the trust. These rules are therefore affecting domestic economy continue to have an effect
how families choose to fund and provide hous- on trends and developments in private wealth
ing for their family members. in New Zealand. The heavy reliance in New Zea-
land on residential real estate as an asset class
Removal of Interest Deductibility for investment and the preponderance of trusts
At the same time as it announced the exten- among property owners ensures that any policy
sion of the bright-line period, the government adjustments affecting property owners will have
also proposed that interest deductibility on a an outsize impact on how trusts are considered
mortgage on a residential investment property and used.
(acquired before 27 March 2021) will be gradu-
ally phased out (as to 25% each year) between
1 October 2021 and 31 March 2025. Given the
historic leverage that was available to property
investors this will have a significant impact on
non-professional investors who have used bor-
rowings to acquire their residential investment
property.
5NEW ZEALAND Trends and Developments
Contributed by: Mary Joy Simpson, John Kirkwood and Emma Tonkin, Hesketh Henry
Hesketh Henry is a commercial law firm based relationship property issues; wills and advice
in Auckland, New Zealand, with a sector-led fo- on issues that arise relating to wills and estate
cus. The Private Wealth Team comprises three planning; enduring powers of attorney; admin-
partners, one senior associate and three solici- istering estates; trust disputes and advice on
tors. They advise clients on a wide range of ser- the establishment and operation of charitable
vices, with a focus on trusts and estates; estab- trusts; and establishing family office structures
lishing, administering and restructuring trusts and advice in managing these through the gen-
and advising on trust structures; opinions on erations. The firm also has a significant practice
complex trust issues for existing clients of the acting for individuals and families dealing with a
firm and referrals from other law firms; prepar- wide range of issues that affect their personal,
ing and advising on relationship property agree- property and business interests.
ments and help in assisting in the resolution of
AUTHORS
Mary Joy Simpson leads John Kirkwood is a partner of
Hesketh Henry’s Private Wealth Hesketh Henry and a highly
Team. Her principal areas of experienced commercial and
practice are estate planning, trust lawyer with more than 30
trusts, relationship property and years in private practice. He
estate management. A specialist operates at the intersection of
in trust law, Mary Joy regularly reviews and commercial and private wealth law. John’s
provides advice on personal asset particular expertise is in small to medium
management. Mary Joy is often asked to enterprise businesses and the business,
speak at seminars and is a member of the personal and wealth planning requirements of
Society of Trust and Estate Planning the people who own and operate them. He has
Professionals. Relationships are important to experience across the wide range of legal
Mary Joy and she has developed strong and issues affecting these individuals, with a
trusting relationships with her clients. Mary Joy particular interest in business and trust
also regularly advises charitable organisations structuring, succession planning for individuals
on legal and structuring issues. and exit and transition planning for the
businesses they own. John also oversees the
estate administration practice.
6Trends and Developments NEW ZEALAND
Contributed by: Mary Joy Simpson, John Kirkwood and Emma Tonkin, Hesketh Henry
Emma Tonkin is a partner in
Hesketh Henry’s Private Wealth
Team. She specialises in private
wealth, real estate and overseas
investment. Emma regularly
advises on trust structures, both
private and charitable; estate and asset
planning; and enduring powers of attorney.
Emma is also an expert in relation to the
Overseas Investment Act and guides clients
through the regulatory process surrounding
overseas ownership of sensitive New Zealand
assets. She has broad experience across a
number of industries, with a particular focus on
real estate. Emma is a trusted family adviser
who guides clients on all aspects of their New
Zealand estate plan.
Hesketh Henry
Level 14
188 Quay Street
Auckland 1010
New Zealand
Tel: +64 9 375 8700
Fax: +64 9 309 4494
Email: lawyers@heskethhenry.co.nz
Web: www.heskethhenry.co.nz
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