Trusts are a popular way of protecting property and managing assets in New Zealand. The number of trusts we have in New Zealand is unknown, but estimates put the figure between 300,000 and 500,000.

The legislation governing NZ trusts has remained unchanged for decades as it has been predominantly governed by the Trustee Act 1956. The Act has been criticised for allowing the mismanagement of trusts with no easy legal redress for beneficiaries, however this is set to change. The legal framework has been subject to an in-depth review by the Law Commission, with the Trusts Act 2017 released in draft late last year, followed by ongoing consultation.

The draft bill seeks to clarify core trust concepts, resulting in a more useful piece of legislation that can be applied to fix practical problems and reduce the costs associated with trust administration. This will effectively impose ‘minimum standards’ for the governance of trusts so that trustees and beneficiaries are clear on their precise obligations, duties and rights.

The draft Bill features seven key proposed reforms that vary in nature from clarifying the key features of a trust, to detailing the duties and powers of trustees.

Under the new Act, trustees will be required to know the terms of the trust and act in accordance with them, act honestly and in good faith, to act for the benefit of the beneficiaries and to exercise their powers for a proper purpose. There are a further eleven default duties that apply, unless they are modified or excluded by the terms of an individual trust deed. The default duties cover areas such as the requirement to invest prudently, avoid conflicts of interest and to act for no reward. The formalisation of Trustee duties will provide protection to beneficiaries that assets will be dealt with in their best interests, and provide legal remedies if trustees fail to meet these standards. The Act also requires trustees to disclose certain information to beneficiaries who are reasonably likely to receive property under a trust.

It will be important for all trustees to understand the new law and their individual trust deeds, to ensure they discharge their duties with the appropriate standard of skill and care.

No changes to the tax treatment of trusts are proposed. However, there is additional focus on trusts from a tax perspective following the recent “Panama Papers” scandal and the alleged misuse of NZ foreign trusts, which has resulted in a Government led investigation into whether existing disclosure rules are adequate. In response, the Government is beefing up the requirements for foreign trusts in three key areas; registration, disclosure, and annual filing. The proposed changes will require all foreign trusts to formally register with the IRD and be subject to an increased number of disclosure requirements, with sanctions for non-compliance with the new rules.

To some degree, the new Act serves to codify existing case law and current best practice, bringing a degree of consistency to New Zealand’s trust regime. Ideally, this will reduce the frequency with which disputes end up before the courts and benefit all beneficiaries, which is ultimately what a trust is designed for.

Technology and change is prevalent across all areas, right through from the supply chain to the customer. Computers are no longer isolated assets; complex cloud based systems allow all areas of an organisation to be truly digital.

Although this can have many benefits, an increased digital presence, combined with the expansion of mobile technology, is exposing businesses to risks; particularly where there has been the rapid introduction of new technologies to keep pace with competitors. As a result, businesses can often lack awareness of the true extent of their digital footprint and cyber-crime is unfortunately on the increase.

Whilst organisations are often aware of the cyber security and privacy threat, a recent survey (Global State of Information Security 2016) found that NZ businesses’ investment in cyber security measures are lagging behind that of comparable economies. Only 17% of NZ digital businesses currently have an internet security policy in place compared to 39% of Australian businesses. Similarly, just 20.5% of NZ businesses surveyed have aligned cyber security spending with business revenue, compared to an overwhelming 63% of global businesses.

There is a further risk that NZ industries may be losing out to global competitors due to a lack of investment in digital security. The EU, South Korea, Hong Kong and Singapore have all introduced comprehensive new data protection regulations. By comparison, NZ has a lack of mandatory reporting obligations for data breaches, which means our businesses may be unprepared to operate in global markets. Although security measures and policies are not currently compulsory here, companies looking to expand cannot afford to neglect the issue.

As every organisation uses digital technology and the internet to different degrees, context is key and a personalised approach specific to the business needs to be taken.

However it is of paramount importance that thought is given to implementing IT security strategies; as a security failure could result in catastrophic damage to the business on a reputational level and severely damage customer relationships.

In the event of a data breach, the business is no longer seen as a victim, but as someone who has not taken sufficient care over data provided to them. It is therefore recommended that:

• cyber security measures are built into new digital initiatives as they are being developed,
• businesses increase their investment into more advanced tools for detection of potential cyber attacks, and
• policies are put in place to respond swiftly to any security breach, as reassurance to all stakeholders and to avoid reputational damage.

In-house IT teams may no longer have the expertise to keep up with the ever changing cyber-threat – outsourced expertise may need to be sought to provide a more cost effective and efficient solution.

Irrespective of the size of a business, one of the challenges for any business owner is to be able to attract and retain talented staff.

One means to do so is an effective remuneration package that motivates staff in a way that aligns their performance with the owners’ business objectives. Not every individual is driven by monetary reward. But it is a key ingredient.

In its most basic form, a remuneration package will comprise payment of a salary or wage and potentially cash bonuses. It is often assumed that the next step is for key staff to be incentivised by having them take a stake in the business. But there is a middle ground that should also be considered. It is relatively straight forward to design a remuneration target that takes into account the performance or value of the business. For example, ‘phantom equity’ involves remunerating an employee based on a set percentage multiplied by an increase in the value of the business. It is akin to providing shares in a business, without actually giving up ownership of the business.

If consideration is being given to providing employees with an ownership share, or such a scheme is already in place, it is important to be mindful of the tax treatment. Employees will naturally look to the employer to ensure they are fully informed regarding the implications. Unfortunately, the tax treatment of employee share schemes (ESSs) are currently under review by IRD.

The IRD’s concern is that there are inconsistencies between ESSs and more vanilla approaches to incentivising employees, such as cash bonuses (and phantom equity).

The IRD have a particular dislike of “conditional” ESSs. Under such schemes, an employee’s continued ownership of shares may be subject to continued employment or performance targets being satisfied. One outcome of such a scheme is that any increase in value after the initial receipt of the share is typically a tax free capital gain.

IRD are of the view that until the shares are free from restrictions, their increase in value should be taxable. Their apparent rationale is that the share is only subject to conditions because the individual is an employee, and therefore any benefit due to an increase in value should be employment income. IRD’s point of comparison is to an ‘ordinary investor’ who might purchase shares on the NZX, who is free from restrictions and whose investment is at risk.

The IRD review commenced in May with the release of an officials’ issues paper setting out their view and was followed in September with an update on their proposals. When designing a reward system, consideration should be given to IRD’s proposals and the uncertainty that currently exists. Depending on the final outcome, there is a risk that either the employer or employee will find it is the IRD that is being rewarded and not them.

The Labour party has recently released an overview of its new housing policy designed to tackle New Zealand’s housing “crisis”. Labour are of the view that property “speculators” are driving house prices out of reach of first home buyers and have proposed new measures to resolve the issue. There is currently a lack of detail around how exactly the new measures will apply, but based on the details available, they could have an impact should Labour be successful in next year’s election.

 Extending the Bright Line Test

Currently, gains from residential property sold within two years of purchase are subject to income tax, unless the property is the seller’s main home, inherited, or transferred in a relationship property settlement. Labour plans to extend the period of the bright line test from two years to five years. This policy has come under fire, with some critics arguing that it will place a burden on landlords selling for legitimate reasons.

 Banning foreign buyers

Labour proposes to ban non-residents from buying existing New Zealand homes. Who will be classed as a non-resident for this purpose has not been defined; which is a crucial detail that could have a profound effect on the ambit of the policy.

In proposing this policy, Labour have referenced disproportionate house sales to overseas buyers and the relative success of a similar policy in Australia.  While non-residents would be banned from purchasing existing homes, they would not be prevented from building new houses in New Zealand. The basis for this presumably being that building a new house adds to the supply.

 Altering rules around negative gearing

Labour have pledged to consult on ways to limit the ability for negative gearing to apply to rental properties, which has been described by Andrew Little as a “subsidy for speculation”. Negative gearing allows landlords to return a taxable loss on their rental properties that can be offset against their other income to reduce their overall tax liability.

In the lead up to next year’s election, the National Government is likely to come under increased pressure because of its perceived lack of action on the housing market. Labour looks to be seizing the initiative by releasing its plan to combat rising house prices. It remains to be seen whether National will bring a similar policy to the table, or whether they are happy to rely on other measures, such as the Reserve Bank’s recent increase in the loan to value ratio for investment properties to 40%.