Hello,

Please find our newsletter for November 2009 below.

If you are wondering why you have received this email - you have been automatically subscribed to receiving our newsletter via email due to being a client of Matley Financial Services.  If you no longer wish to receive these newsletters (which will occur every 3 months or so), please click on the unsubscribe function.

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Is Your Trust Up To Scratch?

Having recently attended a professional development course on effective administration of trusts, it has become evident that in the recent case studies coming out of the courts, the focus of trust busting is not on the administration side of the trusts rather on the intent and robustness of the trusts.

To date Matley Financial Services has focused on the administration ensuring that proper records are kept, administrative decisions are made and recorded and that the proper book of accounts are kept.  While these are certainly important to undertake in terms of the ongoing administration of the trust, the focus also needs to be on the intention of the trust at the time of creation.  So how does one prove intention?

The first thing should be the appointment of an independent trustee.  The purpose of an independent trustee is to ensure that an independent party is being consulted in making the decisions relating to the trust.  While its important to note that this also shows that if the independent trustee has not being consulted it shows that the settlors of the trust had no intention of keeping their assets separate, i.e. the trust assets.

The second step is the ongoing day to day operations of the trust.  At the very least, a separate bank account should be maintained by the trust and assets of the trust should be treated as if they are not owned by the individual settlors. 

There are a number of asset classes which separation is easy to determine. For example, Term Deposits, Shares and Bonds.  However, there are some asset classes where this is more difficult, in particular, family properties or beach properties.

If we take into account a trust that owns investments in Term Deposits, listed company shares, debentures etc, the trustees would most probably take recommendations from a stock broker, or an investment advisor. 

However, when the Trust owns such things as shares in unlisted companies (such as the Family Trusts owning shares in the business), the prudent trustee rule would be that the trustees would consider the soundness of the investment to ensure that they are continuing to invest. 

What this means is that if you are an insolvent company (which is when the assets are less than the liabilities of the company and the company can not meet its debts as they fall due) then the trustees may wish to divest themselves of that investment.  What this means is that if you have a LAQC or a loss company, then it is better that the shares are held in the individual names, rather than in the trust names.

The family home and beach homes are also another consideration when looking at intentions of a trust.  For example, if the trustees wish to purchase a beach in Tauranga and have located one that they like and have gone ahead and purchased it and then advised the trustees, no consideration has been given to where the location of the property is and what the long term prospects are.  While it does not mean that the trust cannot purchase the property, consultation with all trustees and minutes to resolve to consider purchasing a beach property would be the most prudent step, rather than finding something and then retrospectively resolving to purchase it.

So what does this mean going forward?

One of the things that we can offer with Matley Financial Services is a full review of your trust.  We can review the asset classes that the trust currently owns and cross reference that to the minutes and resolutions of the trust  to ensure that due process was followed.  In the event that there are some deficiencies in decisions, then it is a matter of correcting the records to show that those decisions have been made.

However, in terms of intention, the idea is to protect the greatest asset that any family has (which is the family home) from attack by creditors.  Therefore if you treat the family home as if it is your own property and not trust property, then creditors will have a claim against that property if your business falls into trouble.  In order to protect this, the idea is to have at least an annual meeting with your trustees on the property and to go through any changes that have been done during the course of the year - e.g. new decks, carpets etc.  

You are not required to go through and explain what repairs and maintenance have been undertaken on the property on the basis that these have been paid in lieu of rent.  However, any repairs and maintenance should be funded from the individual’s pocket, rather than the trust’s pocket.  The alternative is to treat a rent payment from the individual's to the trust and then the trust pays all associated operating expenses as you would have in any normal rental situation.  This would be further supported by the issuing of a tenancy agreement putting the individuals and the trust.  A tax return may not be required.

For those trust that are administered by Matley Financial Services, we will be undertaking a full review of the trusts in the new year to ensure that the intention can be supported an any necessary documentation to support that intention is held on file.  If your trusts are not administered by Matley Financial services and you wish to undertake a review to ensure that they are compliant as much as they can be, then please contact the office to arrange an appointment to do so.

LAQC's

Remission income can arise when a company is released from a full or partial obligation to repay creditors or loans.  This is becoming a more significant issue in the current climate.

Where the company is a qualifying company, the shareholders are personally liable for their share of any unpaid income tax of the company.  Therefore the shareholders need to consider revoking the QC/LAQC status of the company if the company is unlikely to be able to pay the income tax.

Ideally they should make that decision before the appointment of a liquidator.  We are aware that the IRD has a view that once the liquidator is appointed, the shareholder cannot revoke their QC election as section 248(1)(e) of the Companies Act 10993 says that once a liquidators is appointed, the shareholders' liabilities cannot be altered.

There are other ways a company can drop out of the QC regime, such as revocation of a director's elections or a change in shareholding, but neither of these can be done once a liquidator is appointed.

A reminder too that there are strict rules and timelines for a company becoming a QC/LAQC and maintaining that status.  The IRD gives not leeway for oversights that affect the company's QC/LAQC status.

These are some of the issues we see crop up now and again which are sometimes overlooked:

• Losses carried forward by a company are forfeited on becoming a QC and cannot continue to be carried forward.  The forfeited losses are not reinstated if the company later ceases to be a QC.
• For an existing company an election cannot be made retrospectively.  The notice electing to be a QC/LAQC must be received by the IRD before the commencement of the first day of the year for which the company is going to be a QC.  A late notice would be effective from the start of the next year, and any losses incurred in the earlier years would be lost.
• For a new company the election must be made within the time for filing the company's first income tax return.  This would be to the extended due date if the company has an extension of time at the time of making the election.
• If a trust is a shareholder, dividends paid to the trust must be passes out as beneficiary income.  Overlooking this revokes the company's QC status and can have adverse consequences for later dividends if they are paid out in the mistaken belief that the company was still a QC.
• A change in shareholding may require new elections to be made within 63 days of the change.

 

IRD Strips Uncertainty Around "Asset Stripping"

Under section HD 15 of the Income Tax Act 2007 (formerly HK 11 of the 1994 and 2004 Income Tax Acts), directors and shareholders can become personally liable for the tax debts of a company in certain situations.  The effect of this provision is that IRD can "pierce the corporate veil" if a director or shareholder has been party to an asset stripping arrangement so that the company cannot pay its tax debts.  This is not a new provision however, IRD have rarely used this provision partly because of uncertainty about how the section operated in the context of the disputes resolution procedures.  In particular, IRD were unclear whether a Notice of Proposed Adjustment (NOPA) was required to be issues to a director or shareholder.  In the recent case of CIR v Skudder  the IRD made an application to the Court for a ruling on this particular issue.  the Court held that the decision to invoke section HD 15 was a "disputable decision" which meant that IRD was required to issue a NOPA to directors or shareholders before they could become liable for the tax debts of the company.  This decision is not being appealed.  Armed with certainty about the operation of section HD 15 it is likely IRD will be far more vigilant in its efforts to recover corporate tax debt from directors and shareholders, particularly in these current economic conditions.

If you are looking to enter transactions which might leave your company in a position where it cannot meet its tax liabilities, then consideration should be given to whether personal liabilities could arise under section HD 15.  If you have any doubts, please give our office a call for advice about these issues.

A Few Reminders....

We are still having clients posting information to our old addresses.  We moved in June and our redirection will be ceasing this month, so please ensure that you have updated our addresses and phone numbers are per below or your mail will be returned to you:

Physical - 758A Horotiu Road, RD 8, Hamilton 3288

Postal -  PO Box 10318, Te Rapa, Hamilton 3241

Phone - 07 829 7084 or 0800 MATLEY (628539)

Fax -  07 829 7086

Also, since early this year we have closed our Westpac bank account.  Some clients still have this old bank account logged on their internet banking systems.  Please ensure that the following bank account is loaded into your systems for payment:

National Bank - 060869-0122557-01

Ways to Pay

We have multiple ways that you are able to pay your account:

Cheque - made out to Matley Financial Services Ltd

Credit Card - please phone the office to arrange this

Direct Credit - into National Bank - 060869-0122557-01

Cash - it is still legal tender!  Although, we prefer it not being posted to us please.

Please remember that interest is charged on all accounts over 28 days.  Please pay in a timely manner.

Movember - Week Two

Here is the growth for two weeks down.  So far we have acquired only a meagre $100!  Please, to protect and support Men's health, please consider donating towards this worthy cause.

To sponsor my Mo, you can either:

•    Click this link http://nz.movember.com/mospace/93953/ and donate online using your credit card

•    Write a cheque payable to ‘Movember’, referencing my Registration Number 93953 and mailing it to: Movember, PO Box 12 708, Wellington 6144