Legal eagles examine 'status symbol' family trusts

Law Commission President Hon Justice Grant Hammond. Photo / Mark Mitchell

The Law Commission is taking aim at New Zealanders' widespread use of family trusts - in many cases to hide their wealth or avoid liabilities, including up to $300 million a year in tax.

The commission yesterday released a discussion paper looking at the use of family trusts in New Zealand, where there is one for every 18 people, against one for 34 in Australia and one for 294 in Britain.

Use of trusts in New Zealand has shot up in recent years, from 145,900 active for tax purposes in 2001 to at least 237,500 in 2008.

The commission said the actual number might be as high as 400,000.

It said New Zealand's "trusts culture" had been described as "viral" or influenced by a "me too" syndrome, with many people motivated to establish one just because someone they knew had one.

It was even suggested they were seen as something of a status symbol.

The Law Commission's paper examines the motivations for establishing family trusts in recent decades.

Commissioner George Tanner said the establishment of many of the trusts was "related to Government policies and the advantages that can be gained by transferring assets or income splitting".

The paper notes that family trusts first became popular in New Zealand in the 1950s when they were seen as a means to avoid paying estate duty and other high taxes.

In the 1970s they were seen as "the obvious vehicle" to avoid the impact of new laws which meant matrimonial property had to be equally divided in the event of divorce.

They received another boost with changes to the tax system in 2000 which increased the top rate of personal income tax to 39 per cent while the tax rate for trusts was kept at 33 per cent. But the potential to use trusts as tax shelters was curbed when the top personal and trust rate were aligned in October this year.

Nevertheless, the Government's Tax Working Group estimated that income sheltering using trusts cost the taxman about $300 million in 2007.

It was also believed that trusts have been increasingly used in response to means-testing for some benefits.

Between 1985 and 1998, when there was a surcharge on other income for NZ Superannuation beneficiaries, trusts were often used to eliminate its impact.

In addition, trusts were often used by applicants seeking the residential care subsidy, to reduce their assets in order to satisfy eligibility criteria for the benefit.

In the last Budget, the Government acted to restrict the extent to which trusts could be used to disguise assets and therefore allow higher-income families to qualify for Working for Families.

In its discussion paper, the Law Commission asks why trusts are so popular, whether the existing law on them is adequate and whether limits should be placed on what they are used for.

THE NUMBERS

* 400,000: The estimated number of family trusts in New Zealand.

* 167,925: The number of family homes held in trusts.

* $93 billion: The value of assets held in family trusts - equivalent to 18.6 per cent of all household wealth.

* 50 per cent of all couples with an annual income over $200,000 have a family trust.