Friday, 23 April 2010

Tax and Trustees

The recent decision in the case of Newmarket Trustees Limited v The Commissioner of Inland Revenue 14 April 2010 Associate Judge Faire Auckland High Court CIV-2009 -404-8108 is a timely warning of the difficulties which can be faced by a corporate trustee which administers family trusts. Newmarket Trustees Limited is a bare corporate trustee of the clients of a firm of corporate lawyers in Auckland. The company was a trustee of a family trust for one of the clients. Their client was responsible for preparing his own tax returns, but of course the corporate trustee assumed liabilities on behalf of the trust including tax. The client defaulted in his tax obligations, and the Commissioner served a statutory demand on the corporate trustee. The corporate trustee made an application to set aside the statutory demand, and this decision explains why the application was rejected. Although the deed establishing the trust contained a clause seeking indemnity, counsel for the Commissioner cited well-established principles of trustee law which are worth setting out in full taken from Foundation Custodians Ltd v Morton HC Auckland CIV-2009-404-3112, 2 November 2009 at [24].

A trustee is personally liable for all debts incurred in the conduct of a trust, and the personal assets of the trustee are available to meet the liabilities of the trust.

b) A trustee will normally have indemnity in the first instance from the assets of the trust in respect of liability in a trust transaction: Trustee Act 1956, s 38.

c) Trustees may avoid personal liability for the debts of the trust under a contract with a third party if their liability is expressly limited to the assets of the trust and their personal liability is expressly excluded by the terms of the contract. The need for an express provision in the contract arises because there is a presumption in favour of personal liability: NZHB Holdings Ltd v Bartells at [41] per Baragwanath J.

d) Whether the personal liability of a trustee has been excluded will depend on the language of the particular contract. In NZHB Holdings the following language, quoted at [10] and [42], was sufficient to exclude liability for an independent trustee but not for anyone else:

Persons, except independent trustees, who sign this document shall at all times remain personally liable for all obligations of the persons on whose behalf they have signed. An independent trustee is a person who is not a settler of the trust or has no rights to an interest in or assets of the trust except as a trustee of the trust.

The problem of course for the corporate trustee, was that they were the trustee for many other trusts, including other family trusts which owned property, shares and other interests. The judge was critical of a lack of evidence of the client's affairs and of any enquiry as to whether the clients trust had any money. The potential immense inconvenience was stressed by counsel. But, the application was refused because of the above principles which are well established law. The judge did allow a further period of time for the corporate trustee to negotiate with the Commissioner. Reading between the lines, one senses a frustration by the Commissioner as to a lack of information provided. Obviously liquidation of the corporate trustee would provide nothing for the Commissioner, and cause enormous inconvenience for the corporate law firm. But it may make them actively pursue their client, which may have been the object of the Commissioner. The decision, from the senior associate judge, must carry considerable weight but cause a frisson of fear among professional trustees. They should be taking a more active involvement in their clients affairs, and ensure that the Commissioner is kept informed.

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