Independent trustees deemed to have the same intention of the other trustees, even if that intention was unknown

A topic of continual interest and discussion is the use of the family trusts in New Zealand to undertake business transactions. Such trusts are commonly referred to as trading trusts.

A likely outcome of the New Zealand Law Commission’s review of trusts are higher standards to be satisfied by trustees in the future.

A recent case, TRA019/11, is another case demonstrating the requirement for extreme caution when using a trust as an operating business vehicle. In this case the Taxation Review Authority (“TRA”) held that two of the three trustees, being the husband and wife, had the intention or purpose to sell properties when acquired. The third independent professional trustee argued that she had no similar purpose or intention and, therefore, because the trustees must act unanimously, there could be no liability due to the lack of intention for all trustees.

The TRA did not agree. It ruled that the intentions or purposes of some, but not all, of the trustees of a trust can be attributed to the trust as a whole. Accordingly, the intention or purpose of the husband and wife was attributed to the independent trustee.

Because of the nature of buying and selling a large number of properties, the TRA held that the trust was in the business of erecting buildings and buying and selling properties. The trust bought and sold 11 properties, of which 10 had new houses built on them, with relatively short times of occupation.

The TRA found that the trust was liable to account for GST and income tax because the trust was engaged in the business of erecting houses on the properties, which constituted a taxable activity, and that shortfall penalties would apply due to the gross carelessness of the trustees.

It is difficult to understand in this case how an independent trustee could not see that the trust was undertaking a business activity, given that the trustee would have been required to sign documentation buying and selling houses, borrowing money from the bank and signing financial accounts.

Any tax liability that is owed to the Inland Revenue Department for income tax or GST is a personal liability of trustees. This is a lesson to be learned in the proper administration of a trust and furthermore, the inappropriateness of a trust being utilised for business purposes, without taking the correct legal and accounting advice.

BlackmanSpargo strongly believe that the proper administration of trusts, whether or not we are trustees, is an important role ensuring that risks of trustees and trusts are reduced and properly managed.