Far Out, its February!

Posted 4 years, 7 months ago by Maggie Waine    1 comment

Where has the time gone?  Its flown by so quickly.  The Easter eggs are out in shops before the tinsel is vacuumed up!!

The month of January was a busy one on the personal side.  David had surgery at the end of January to remove his varicose veins and has been on bedrest for the last two weeks.  He will be back in the office on Monday 11th February.  Thanks to the staff in the Hamilton and Tokoroa offices however, we are pretty sure that most clients weren't aware that he was out of action!  He is making a great recovery and Heath is enjoying immensely being able to climb all over him again.

 

"TRUST BUSTING" IN THE FAMILY COURT. DON'T RELY ON IT.

Anthony Grant - www.anthonygrant.com

Many lawyers think the Family Court is "soft" on Trusts and will modify them by one means or another.

JEF v GJO & Anor [2012] NZHC 1021 - a decision of Duffy J on appeal from Judge Brown - shows this assumption is wrong.

A woman, who had children from a previous marriage, met a man in mid-2004.  She was having a home built and it's now owned by "her" Trust.  The man had two children and was about to separate from his wife.  After the separation he acquired a house ("Lee Road") which was transferred to a Trust of which he and his accountant were trustees.  Following the transfer the Trust owed him $650,000.

The man and woman started a sexual relationship in about June 2004, and in October 2005 she and one of her children moved into Lee Road.

She left the house in 2008 and, with a parting gesture of ingratitude, handed the man a notice of claim under the PRA.

This is how the Courts treated her claims.

  1. She said the debt of $650,000 was relationship property.  As the debt arose from a transfer of Lee Road to the Trust when the parties were not in a relationship, Judge Brown said the debt was not relationship property.
  2. She said that as he had left the debt to her in a Will that he later revoked, it should be treated as relationship property.  The court said that separate property does not become relationship property because it is left by one party to another in a Will.
  3. She said that as the sum of $100 that was supposed to have been settled on the Trust at the outset had not been paid, the Trust was void for uncertainty.  Both Judge Brown and Duffy J rejected this. ("I see no reason why the $100 cannot still be recovered from [the man's] estate" - Duffy J.)
  4. She said the man's right to occupy the house at Lee Road was relationship property and the value should be divided.  Judge Brown said the man occupied the property pursuant to a discretion and right to occupy was not an item of property that had value.
  5. The man had the right to appoint and dismiss trustees.  The woman said these rights had a value equal to the value of the Trust's assets and the right was relationship property.  Without referring to the "Bundle of Rights" doctrine as such, the argument was rejected.  Reliance was placed on Winkelmann J's decision in FMA v Hotchin [2011] 2 NZLR 469 where she held that a power to appoint trustees and discretionary beneficiaries does not give the appointor "control over the assets of the Trusts, because that control rests, at law with the trustee..." [83]
  6. The man had included the Lee Road property in the Will that he later revoked.  The woman said that by treating the property as his own, there was an "alter ego" Trust.  Judge Brown held that as an "alter ego" Trust is merely evidence to show a sham Trust, and as no claim of sham had been pleaded, her claim failed.  Duffy J said "The mere fact that there was actual control exercised by the settlor over the trustees or the Trust property [does] not provide justification for looking through or invalidating a Trust.  It is merely an indication that the settlor had an intention to create a sham Trust" [63].  There was good evidence that the man created the Trust to provide assets for his children:  "the evidence shows that a primary motive" for the Trust was to provide for them [69].
  7. Judge Brown said that if the argument of sham had been pleaded, he had no jurisdiction to determine the dispute since the Family Court cannot investigate claims in equity where the amount in dispute is more than $200,000.  Duffy J said she saw no reason to "address the question of whether the Family Court has jurisdiction to determine the validity of Trusts".
  8. The woman said she had a good claim for a constructive trust over assets of the Trust "because she put energy and time into upgrading and making the Lee Road property acceptably presentable" [31].  Judge Brown said that the man had paid for the cost of redecoration; the woman had live rent-free in the property at Lee Road while being able to rent out the property that was in "her" Trust; and that "it would be inequitable for her to have a constructive trust" interest in the Lee Road property [31].
  9. The woman said the trustees held the Lee Road property on a bare Trust and, as a consequence, the man was the beneficial owner of the property.  Duffy J held that the man, being one of two trustees, was not "absolutely entitled" to the asset.  The trustees were not therefore bare trustees [78].  If he was a bare trustee, he was only one of several beneficiaries and they all had a beneficial interest in the property.  And even if his discretionary interest could be considered to be "property", it was not relationship property since the interest had been created before the relationship began.
  10. The woman made claims under ss.44 and 44C (which concern the disposition of relationship property to a Trust).  These claims failed because the relationship began after the property was transferred to the Trust.

Lesson: The Courts are not as opposed to Trusts as some people think.

 

RELATIONSHIP PROPERTY AND TRUSTS - THE LAW COMMISSION'S CURRENT PROPOSALS

Anthony Grant - www.anthonygrant.com

First, a bit of history, In 1867 England gave us a short provision which empowers the Courts to modify "nuptial settlements" - ie settlements that have been made on one or both parties to a marriage or an intended marriage.

The Courts have said that a Trust can be a "nuptial settlement".  The provision, whose current statutory identity is s 182 of the Family Proceedings Act, applies to Trusts that were settled by one or other of the spouses and to Trusts that were established (and funded) by a parent or other relative of one of the parties to the marriage.

For a century or more the section was "buried" in statutes where its existence was unknown to the legal profession.  When Parliament modified the Matrimonial Property Act in 2001 the politicians weren't aware of s 182's existence.  Not only that, but they refused to enact provisions that were anything like as invasive of Trusts as s 182 is.

Instead, they enacted, s 44C of what became the Property (Relationships) Act - a much more modest provision.

Section 182 as it exists today is an anomaly, like a time traveller who has ended up in the wrong century.

  • It is available to people who were married or were parties to a civil union and isn't available to co-habitees.
  • It isn't available on separation, but only after a marriage or civil union has been formally dissolved.

These anomalies stem from his historical origin.  Back in the days when women had the status of chattels, they had no property rights, and they couldn't vote, when divorces were almost impossible to obtain and when people who co-habited out of wedlock (note the sinister connotation in that historic term) were said to live "in sin".

The Commission proposes that s 182 should be amended in two ways:

  • It should be available to de facto couples; and
  • It should be available as from the date of separation, rather than from the day when a marriage or civil union is dissolved (more than two years later).

Any change that makes s 182 more readily available, clashes with the will of Parliament when it last considered the rights that should be available to people following the dissolution of a marriage or de facto relationship.

The Law Commission is concerned with "black letter" law.  Not social policy.

Having read the Parliamentary debates, the draft Bills and the other materials that preceded the enactment of the PRA, I think it inconceivable that Parliament intended that a Trust established by a parent for a child following the child's marriage, should be able to be broken into and all its assets taken by the child's spouse at the end of a relationship.  Yet that is what s 182 allows.  I aslo think that it is morally wrong in this day and age that the Courts should allow one spouse to seize the other spouse's inheritance.

Section 44C

The Commission suggest that s 44C might be modified to require trustees of a Trust to which relationship property has been transferred, to compensate the spouse/partner whose claim or right has been defeated by the disposition.  Alternatively, it suggests that the PRA should be reviewed "to determine whether there are circumstances ... where dispositions to Trust should be set aside, to better give effect to the equal sharing regime in 'the PRA'".

If s 182 is retained and extended to include Trusts that are associated with de facto couples, changes to s 44C are unnecessary.  The Courts will have ample powers under s 182 to make any changes they like to Trusts, including the incorporation of new clauses that require the trustees to disgorge assets to an estranged spouse or partner.

The Commission's proposals for s 182 are understandable when viewed from the perspective of legislative consistency.  If the section is available to people who are married and the subject of civil unions, it is entirely logical that it should extend to de facto unions since de facto unions are now recognised by law.  Similarly, it is logical that s 182 should be able to be invoked after parties separate, rather than when their marriage or civil union has been formally dissolved, since other property rights can be invoked on separation.

The bigger picture is where s 182 should sit in our law, having regard to Parliament's refusal to enact a law that resembles s 182 - even remotely.

If the Trustee Act is to be comprehensively amended, Parliament should simultaneously look at the PRA and consider whether the Courts should have an unfettered hand to make any changes that they like to "nuptial" settlements.

The Commission made an alternative recommendation for modifications to the PRA and I favour Option 2.  This provides that "a review of the [PRA] should be undertaken to determine whether there are circumstances (not currently addressed by the provisions of the PRA) where dispositions to Trusts should be set aside ... ".

 

 FONTERRA DIVIDENDS - Clarifying the tax treatment of Fonterra dividends.

Mark Irving, CA [December 2012 NZICA Journal]

As Trading Among Farmers (TAF) continues to progress to reality, the tax treatment of Fonterra dividends from the new entities created - the Fonterra Shareholders Market and Fonterra Shareholders Fund - is still being considered.

This prospect has prompted a review of the tax treatment of the current Fonterra dividends due to some apparent variation among tax practitioners.

Fonterra sought and got legislation enacted in 2010 for special treatment of its new dividend which was previously described as a Value Add payment.  Under CD34B the general rule is that a distribution from a co-operative company is not a dividend, provided that the co-operative company elects in writing to the Commissioner to apply the rule before the distribution, and that election has not been revoked.  Fonterra has confirmed that they do make the election each year when they file their tax return.

As a distribution of business income for income tax purposes there are some consequences.

From Fonterra's perspective there is no requirement to attach imputation credits or deduct any withholding tax.

As the distribution is not a dividend it is part of the farm income for income equalisation deposit purposes.  A dividend on the other hand is not part of "net income from the business of farming" which determines the maximum income equalisation deposit a farmer can make in a year. 

As farming income, and if received by a sole trader or partner in a partnership, then that income is liable for ACC levies, which currently for a dairy farmer total 4.7% of that income.

The Fonterra Roadshow to Rural Professionals in August indicated some fruther changes for current dividends and outlined some general principles that are likely to apply to the new Fonterra Shaereholders Fund entity.

Fonterra has obtained a non-binding ruling from Inland Revenue (IR) that buying and selling shares to meet the Share Standard requirements will generally be on capital account.

The tax treatment of dividends on dry shares will change.  They will be treated as dividends for tax purposes as opposed to business income.  Fonterra will be required to deduct resident withholding tax (RWT) where applicable.

The tax treatment of dividends on wet shares will not change and they will still be treated as business income.

Neither will the treatment for GST purposes change, with both wet and dry share dividends not subject to GST.

The Fonterra Shareholders Fund will elect to be a portfolio investment entity (PIE) for income tax purposes.  The Fund will pay tax on behalf of resident investors at their prescribed investor rate (PIR).

TAF will have implications for sharemilkers as the additional flexibility of the three-year rolling average as the Share Standard will mean that in good production years the shares held will be less than production but still compliant with the Share Standard.  A lower price will be paid for non-share backed milk supplied.

Fonterra has emphasised that the above changes are all subject to TAF proceeding and the details being in the prospectus that will be issued.  Meanwhile, the correct treatment of the current Fonterra dividends is a "live" issue.

PROVISIONAL TAX DATES FOR NEW NON-STANDARD BALANCE DATE TAXPAYERS

The Commissioner has conceded that he incorrectly interpreted legislation around the timing of provisional tax payments for new non-standard balance date taxpayers.

Initially of the view that every taxpayer had a 31 March balance date, the Commissioner consented to taxpayers adopting a non-standard balance date.

The consequent practice of treating the first year of an entity which had adopted a non-standard balance date as a "transitional year" was stated as being based on the Commissioner's interpretation of the legislation.

The effect of that interpretation was that new taxpayers were required to pay provisional tax two to three months earlier than would otherwise be required.

After being challenged on that interpretation, followed by nine months of stonewalling, the Commissioner has now conceded his interpretation was wrong.

Where it is clear a non-standard balance date has been requested and approved at the time of inception, then the first year is not to be treated as a transition year.  In practice that simply means applying for the non-standard balance date with the required supporting information at the same time as applying for an IR number for the entity.

 

HOW WE DO THINGS AROUND HERE

A group of scientists placed 5 monkeys in a cage and in the middle a ladder with bananas on the top.

Every time a monkey went up the ladder, the scientists soaked the rest of the monkeys with cold water.

After a while, every time a monkey went up the ladder, the others beat up the one on the ladder.

After some time, no monkey dare to go up the ladder regardless of the temptation.

Scientists then decided to substitute one of the monkeys.  The first things this new monkey did was to go up the ladder.  Immediately the other monkeys beat him up.  After several beatings, the new member learned not to climb the ladder even though he never knew why.

A second monkey was substituted and the same occurred.  The first monkey participated on the beating for the second monkey.  A third monkey was changed and the same was repeated (beating).  The fourth was substituted and the beating was repeated and finally the fifth monkey was replaced.

What was left was a group of 5 monkeys that even though never received a cold shower, continued to beat up any monkey who attempted to climb the ladder.

If it was possible to ask the monkeys why they would beat up all those who attempted to go up the ladder.... I bet you the answer would be....

"I don't know - thats how things are done around here"

Does it sound familiar?


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