There has been a lot of discussion and many articles written about the liability of trustees and the validity of trusts. Trustees have a responsibility which is effectively a duty of care. Where trustees fail to exercise that duty of care to the requisite level, liability can follow.
When it comes to taxation, trustees are, at first instance, liable for tax on trustee income. Trustees also become personally liable for GST. The issue around liability and the consequences therefore becomes significant.
One way trustees have previously sought to protect themselves is to use a trustee company. The recent Court of Appeal decision in Newmarket Trustees sends a very clear message that the use of a corporate trustee is not a perfect solution.
The case involved the law firm, Castle Brown that established Newmarket to offer trustee services to its clients. The directors of Newmarket were partners in Castle Brown. Newmarket was a trustee of over 100 trusts. It did not have any beneficial interest in any of the assets owned by those trusts. Nor did it own any other property and was effectively assetless.
One of the trusts of which Newmarket was a trustee was a trust called the Southern Lights Trust (SLT) whose settlor, Mr Goh, was a client of Castle Brown and also the other trustee of SLT. Unbeknown to Castle Brown, the trustees of SLT had been assessed for GST and income tax on assessable income derived from property transactions that had not been disclosed to the Inland Revenue Department (IRD). Mr Goh was adjudicated bankrupt on 6 May 2010.
In order to obtain payment of GST and income tax on the property transactions from Newmarket, the IRD served a statutory demand on Newmarket under s 289 of the Companies Act 1993. The debt was not paid and the IRD applied for an order for the liquidation of Newmarket. The Court of Appeal noted that, based on wider public interest considerations and well-established principles of trustee law, as a matter of principle, Newmarket, as an insolvent trustee company, ought to be liquidated.
How it affects you
If you are a trustee personally, or are using a trustee company, if a liability to pay tax arises, and the tax is not paid, the Courts take action. This may result in a company being liquidated or perhaps an individual being bankrupted.
For a professional trustee, the message is clear. One trustee company for one trust is the only safe alternative.
WHO MUST PAY THE PIPER?
Goods and Services Tax (GST) has been around for a long time. It is legislation that was prepared almost overnight and has been patched ever since. As a result, it is some of the more complicated legislation we have to deal with.
One of the big, and often hard to answer questions is, who has to pay the GST to the IRD?
Mortgagee sales and the appointment of liquidators, receivers, and voluntary administrators have become reasonably common. The Goods and Services Tax Act 1985 (GST Act) includes special provisions to deal with these situations.
Recent court cases on mortgagee sales and incapacitated persons (as defined in the GST Act) illustrate the consequences of getting the GST treatment wrong. Inevitably, the sale proceeds will not be sufficient to pay the GST on the sale to the IRD and also to pay the amount owing to the bank.
In a recent court case, the Court of Appeal has indicated that not only does a liquidator or receiver exercising a power of sale have a liability for the GST on the sale, but they also have an obligation to make sure that the company continues to comply with all legal obligations, including compliance with tax laws.
Where a company continues to trade after commencement of liquidation or receivership, the liquidator or receiver, having regard to the decision in Simpson & Downes, must ensure that the income tax obligations are met, and may be faced with either civil or criminal penalties, or both, if the company fails to meet its taxation obligations.
In many cases, the amounts involved are significant and there are still many uncertainties. Where is the line drawn?
If a liquidator is able to collect an amount that has been outstanding for some time in relation to a supply made before the liquidation, does the liquidator still have to return the GST amount to the IRD? The answer generally is no. It is the insolvent debtor that normally would be liable to return the GST to the IRD.
How it affects you
If you are a liquidator or a receiver, or are looking to exercise the power of sale in relation to an unpaid advance, we recommend that you obtain advice regarding any taxation issues or liabilities that you may have, before you take on the role.
POINTS OF INTEREST…
Further limits to the student allowance scheme will come into force on 1 January 2013.
David Ireland has been elected as Chair to the Financial Advisor Code Committee.
The Supreme Court has dismissed an application to appeal Russell v C of IR (2012) 25 NZTC, which rejected Mr Russell's objection to a tax assessment. The Russell saga continues.
The 2012/13 work programme for the IRD is being developed and it should be available in early September.
TO THE POINT…
"If a free society cannot help the many who are poor, it cannot save the few who are rich".
John F. Kennedy