The New Zealand Institute of Chartered Accountants (NZICA) is warning professionals that the Inland Revenue Department (IRD) is actively pursuing trustees personally for tax debts owed by a trust, including those trustees with no personal connection or interest in the income or assets of the trust.
NZICA says it is aware of a number of cases where the IRD is seeking to recover substantial tax debts (including penalties and interest) owed by a trust from a professional advisor acting as a trustee. In many cases this will be the family lawyer or accountant.
NZICA Tax Director Craig Macalister says he considers the IRD’s actions of solely pursuing professional trustees in these circumstances for the whole debt, when they have no interest in the income or assets of the trust, to be inappropriate. In Mr Macalister’s view this is the same as pursuing independent company directors for a company’s tax debt:
“When a trust is not in a position to meet its tax obligations, it would seem that Inland Revenue will pursue the trustee with the deepest pockets, which will invariably be the professional trustee who has taken on the role as part of their engagement with the client. This is despite the fact that the trustee is clearly only acting in his/her professional capacity.”
Moving rhetoric aside, there is no special category of independent trustee. All trustees are jointly and personally liable for any debts or liability incurred as a trustee, whether or not the trustee can benefit from the assets of the trust. A trust does not have legal personality independently of the trustees. Accordingly, any trustee is personally liable for the consequences of the trustee’s actions as if the trustee had acted personally on the trustee’s own account.
This is confirmed in the Income Tax Act 2007, which provides that all trustees are jointly and severably liable for tax on trustee income. This means that at law the IRD can (and arguably pursuant to its duty to collect the highest net revenue over time, must) seek to recover taxes from any trustee, regardless of whether that trustee can benefit from the assets of the trust.
Where a trustee is required to meet a trust’s liability – whether or not a tax liability – the trustee is entitled to be indemnified from the trust. Of course such a right is somewhat pyrrhic where the trust is insolvent or has insufficient assets to meet the trustee’s liability.
Also, as a matter of contract, trustees can also contract to avoid liability. However, trustees cannot contract out of tax liabilities. A clearer appreciation of liabilities may mean that less people wish to act as trustees, which may not be a bad thing. Appointment as a trustee garners little honour and glory and can involve significant risk.
In closing, referring back to Mr Macalister’s analogy with companies – actually there are circumstances where the IRD can pursue directors (and in some cases shareholders) for a company’s income tax and GST where a tax shortfall results from an arrangement. This is important given that the common response to trustee liability is to act as the director of a corporate trustee, rather than personally.
While this can still be a valid solution to most risks, before accepting appointment as a trustee (or as director of a trustee company) the prudent person would assess what indemnities are available outside the trust and the value of assets (in or outside the trust) to ensure the worth of any indemnity.