OPINION: There has been a lot of discussion and many articles written about the liability of trustees and the validity of trusts, writes Jay Changlani in Taxing Times.

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 can be liable for tax on trust income. Trustees also become personally liable for GST. The issue around liability and the consequences therefore becomes significant.

One way trustees sought to protect themselves was to use a trustee company. The recent Court of Appeal decision in Newmarket Trustees sends a 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 more than 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 called the Southern Lights Trust (SLT) whose settlor, a Mr Goh, was a client of Castle Brown and also the other trustee of SLT. Unknown 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. Goh was judged bankrupt on May 6, 2010.

To obtain payment of GST and income tax on the property transactions from Newmarket, Inland Revenue served a statutory demand on Newmarket under s289 of the Companies Act 1993. The debt was not paid and Inland Revenue 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.

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 will take action. This may result in a company being liquidated or perhaps an individual being bankrupted.

For any trustee, the message is clear. You can be held liable so be aware of the trust's activities and obligations. For professionals who use trustee companies, it would appear that one trustee company per one trust is the preferred alternative.

» Jay Changlani is a tax manager at accounting firm WHK. Phone 03 211 3355.

- © Fairfax NZ News

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