Should I have a Family Trust?

The words “Family Trust” can evoke all sorts of images; especially for those not familiar with them, but they are a valuable tool for many New Zealanders when it comes to asset protection, tax planning and inheritance/estate planning. Having a family trust can be stressful if not done correctly or planned properly from the beginning, however there are good reasons why family trusts are so popular with kiwis.

Official estimates are that there could be as many as half a million trusts in New Zealand. Many of these will own the family home, maybe a few investments but not much more.

While the advantages of having a family trust out-weigh the disadvantages, they are not a “magic bullet” or “cure-all”. There are disadvantages in having a family trust that are important to know.

Disadvantages of a Family Trust

1. Legal compliance – a trust is a separate legal “person”. This means that there is paperwork and legal requirements that must be met.

2. Cost – there are fees to set a trust up and, in most cases, annual fees for the ongoing costs of managing the trust.

3. Complexity – a trust adds a layer of complexity to things that was not there beforehand. “Normal” every-day decisions, such as buying or selling a house, will need to be properly documented and important documents signed by all the trustees (managers of the trust).

4. Time – with increased legal compliance and complexity, additional administration time will be required for trust related matters.

5. Loss of Ownership – once a trust owns your assets, such as the family home, you are no longer the legal owner. While this is one of the main purposes of a family trust, it can still be daunting to some people to realize that they no longer “legally” own their home.

Given these disadvantages, why do so many people still choose to have a family trust?

Because the Advantages can be worth it…

1. Protection of Personal Assets – if you have a business or provide personalized advice (such as an engineer), your personal assets (family home, rental properties, savings and investments) could be at risk from creditors or lawsuits against you. A family trust isolates you from your personal assets, protecting them from business or legal challenges.

2. Special Purpose – a family trust can be used to ensure that funds are set aside for matters important to you. This may be things such as the long-term care of a handicapped child or helping with the costs of a grandchild’s education.

3. Separating Assets from Relationship Property – whether from concerns of an ex-partner making a claim against your estate in the event of your death, a new relationship not lasting or protecting the inheritance money of children from their present (or future) spouses, a trust helps isolate inheritances from personal assets.

4. Residential Care Subsidies – if you require permanent rest home care when you retire, you may be eligible for a rest home care subsidy. Currently Work and Income (WINZ) tests the income and assets of recipients to determine their eligibility for this subsidy. When assets are transferred appropriately, and in a timely manner to a trust, these assets (and any income they generate) can be excluded from this calculation.

If you want to know more about family trusts, want to know if a family trust is suitable for your circumstances, or want help in initial planning for a family trust, contact us today. We are happy to help you.

If you are a New Zealand business seeking overseas investment, there are new requirements you’ll need to follow. Find out about the changes and what you need to do.

When: From16 June 2020

What: Changes have been made to rules that impact New Zealand businesses looking for overseas investment. The changes include:

• a new requirement to notify the Overseas Investment Office (OIO) about overseas investments, and
• a new national interest test that will apply to some investment transactions.

OIO will need to be notified about all overseas investments that will result in:

• more than 25% of a New Zealand business or its assets being owned by investors outside of New Zealand, or
• an increase to an existing holding beyond 50, 70 or to 100%.

A new national interest assessment will apply in rare circumstances to evaluate whether an overseas investment in sensitive and high-risk assets are in New Zealand’s national interests.  

Changes also mean the application process for lower-risk investment transactions is simplified, and some transactions will no longer need consent.

Changes to the Overseas Investment Act (external link) — Overseas Investment Office

Who: New Zealand businesses seeking overseas investment.

Why: Overseas investment can support New Zealand’s COVID-19 economic recovery, so that businesses can continue to grow and evolve, and keep more New Zealanders in jobs. The right checks and balances are needed to protect businesses that are important to New Zealand’s national security, economy, and communities.

What you need to do: If you are seeking overseas investment, be aware of the changes to when the OIO needs to be notified, and that a new national interest assessment might apply to overseas investors wanting to invest in your business.

Businesses seeking investment should get advice from their advisors, for example a lawyer or accountant.

New measures that protect consumers who borrow from high-cost lenders and mobile traders came into effect on 1 June 2020.

The measures are aimed at preventing predatory lending practices that trap vulnerable consumers in debt and include:

• capping the interest and fees on high-cost loans to 0.8 per cent per day
• requiring mobile traders to comply with responsible lending protections in the Credit Contracts and Consumer Finance Act. 

These changes are part of wider improvements the Government is making to consumer credit law. Other changes relating to high-cost credit that came into effect on 1 May 2020 include limiting the total cost of credit to 100 per cent of the loan principal, banning compound interest, and limiting default fees to $30.

The Government is aiming to have further consumer credit reforms, including new affordability regulations and new requirements for lenders to meet fit and proper person thresholds, in place from 1 October 2021.

More information is available on MBIE’s review of consumer credit law.

Read the media release on the Beehive website(external link).

• Extra 40,000 businesses to be eligible for wage subsidy extension

• Small business cashflow support application period extended

The Government is today announcing further support for businesses that continue to be affected by the global COVID-19 pandemic, as the broader economy becomes one of the most open in the world following the success of New Zealand’s public health efforts.

A change in criteria for the extended wage subsidy scheme means an extra 40,000 businesses will be eligible. After feedback from businesses, the Government has taken the decision to change the required revenue drop threshold from 50% to 40%. Up to 230,000 businesses are now forecast be eligible for the new 8-week scheme from 10 June, covering up to 910,000 workers.

Small businesses are also being given more time to apply for the Small Business Cashflow Loan Scheme, with the application date being extended from 12 June to 24 July.

Finance Minister Grant Robertson said the changes show the Government is working with the business community to put considerable support in place to protect jobs and incomes during the 1-in-100 year global economic shock caused by COVID-19.

“We moved quickly to put the wage subsidy in place to cushion the blow. We’ve also shown we will move quickly to make changes so support is targeted to where it is needed most, based on feedback from our regular engagement with the business community.

“While many New Zealanders are now back at work and our economy is one of the most open in the world, there are businesses that will feel the impact of this global pandemic for longer. The tourism, retail and hospitality sectors will in particular be supported by the extended wage subsidy and cashflow support.”

Carmel Sepuloni said the wage subsidy was successfully protecting jobs and giving businesses the ability to stay connected to their workers as the economy reopened. The scheme has paid out $10.997 billion to date, covering 1.66 million jobs.

“Nearly two thirds of businesses surveyed said the wage subsidy meant they were better able to use other cashflow for non-staff overheads, like commercial rent. About 89% said the wage subsidy will help them keep operating for the foreseeable future, while only 6% of those surveyed have indicated they are considering redundancies in the next few months.”

Stuart Nash said the extension to the Small Business Cashflow Loan Scheme recognised that many businesses were still planning for the future as the economy opened up more quickly than expected following the success of New Zealand’s public health response.

“The high level of demand we’ve seen for these interest-free loans to date shows we made the right decision to support SMEs with direct lending from the Government, through IRD. Extending the application date will give business owners the confidence that support is available if needed as the economy opens up.”

To date, more than $1.18 billion has been disbursed to more than 70,000 small businesses under the cashflow scheme. The loans are interest-free if repaid within a year. Businesses have five years to pay the loans off, with no repayments required during the first two years.

The changes to the extended wage subsidy scheme mean it is now forecast to provide between $2.6 billion and $3.9 billion of support to businesses to help them with their wage bills, up from a top estimate of $3.2 billion under the old threshold. This will be funded through the COVID Response and Recovery Fund.

The Government has also amended the revenue test under the extended scheme so that the business must have a revenue loss of at least 40% for a 30-day period in the 40 days immediately prior to the application date (but beginning no earlier than 10 May 2020) versus the nearest comparable period last year.

The wage subsidy and small business cashflow scheme are part of the extensive support the Government has made available for businesses, which includes:

• The $11 billion wage subsidy and $3.9 billion extended wage subsidy

• The $5.2 billion Small Business Cashflow Loan Scheme

• $3.1 billion for business tax refunds through the loss carry-back scheme

• $2.8 billion for building depreciation tax deductions and other tax measures

• The $6.25 billion Business Finance Guarantee

• Commercial rent support, including $40 million to cover arbitration costs

• The $400 million initial support for the Tourism sector

• A $600 million aviation support package

• Funding for business advice through the Regional Business Partner Network

• A $400 million package to encourage R&D

Inland Revenue is urging small businesses, looking at applying for the Small Business Cashflow scheme, to do so quickly.

Inland Revenue administers the Government’s Small Business Cashflow scheme, handling loan applications, payment and repayments. The scheme has just 22 days to run until it stops on 12 June.

Inland Revenue spokesman Richard Philp says 47,318 businesses have already applied for the loans for small businesses struggling with loss of revenue due to COVID-19.

“The Small Business Cashflow [Loans] Scheme  was successfully set up and implemented quickly. Applications opened on 12 May and in the first ten days Inland Revenue received and approved 45,290 (97 per cent),” Richard Philp says.
 
“That’s $784.9m in loans out the door, usually within a couple of days of being received and verified. 88 per cent of those loan applications were from people who also received the wage subsidy.
 
“It’s been done almost exclusively online with 99.8 per cent of all applications successfully made through Inland Revenue’s secure online service, myIR.
 
“Typically, it’s been very small businesses applying for the Scheme. 46 per cent of approved loans applicants have between 2 and 10 employees.  And 43 per cent are sole traders with the business owner the only person working in the business.
 
“The Scheme ends on June 12, so it only has around three more weeks left to run. My advice is that any businesses wanting to apply for a loan should check out what information and documentation they need to apply, gather it together and apply online.
 
“Otherwise, they’ll run out of time,” Richard Philp says.

It’s essential that people fully understand the loan terms and conditions as set out in the loan contract which are available on IR’s website www.ird.govt.nz/covid-19.

“If there is information missing, that could be a reason for declining a loan application”, Richard Philp says.
 
“Also, if there are any facts or circumstances which have not been disclosed that make any information untrue, inaccurate or misleading, then this could cause a loan to default.  A defaulted loan must be repaid immediately.

“The scheme has been developed and implemented by IR staff working from their dining room tables or temporary home offices. And they’ve briefed tax agents and accountants about it while working from home. I’m very proud of the work they’ve done.”

To be eligible for a loan, a business or organisation must have 50 or fewer full-time-equivalent employees and be eligible for the Wage Subsidy Scheme even if they have not applied for the subsidy.  The business must also have a sound plan to be viable and ongoing, and it must hold information on file to verify this.

In most cases, businesses will be entitled to a loan amount of $10,000 plus $1,800 per full-time-equivalent employee, to a maximum of $100,000. Currently, the average loan amount approved is $17,331.22.

The loan has a five-year term and must be repaid by 31 July 2025. Businesses should speak with their financial advisors before applying.

Changes coming to property market: Property Institute

Property Institute of New Zealand Chief Executive Ashley Church says the impact of the election on the New Zealand property market can already be largely predicted – even though the final make-up of the next Government could be weeks away.

Mr Church says that the role of NZ First as ‘King or Queen maker’ in coalition negotiations means that much of what is likely to happen is predictable because New Zealand First policy positions will feature whether National or Labour is ultimately chosen as a coalition partner.

“While the coalition talks are all about negotiating positions – Peters will have considerable leverage over both parties – so there are some bottom lines that we can reasonably expect to find their way into any final agreement”.