PONSONBY PROFESSIONALS

TALKING TRUSTS: RICK & JESSICA

Rick and Jessica had set up their trust almost 20 years ago. It owned their family home, a commercial investment property and the shares in their residential investment property company.

Tammy McLeod They were the trustees together with their lawyer. Rick and Jessica had two adult children and they had been considering helping them into their own homes. The trust didn’t have any ready cash but it did have a lot of equity and Rick and Jessica were thinking of ways that the trust could access the equity to help their kids.

Rick and Jessica had also heard about the changes to trust law under the new Trusts Act which had come into force earlier in the year. They were keen to make sure that they complied with the new Act, but were relying on their lawyer to make sure everything was OK. They hadn’t heard anything from him, and a friend mentioned that they had been to see a specialty trust lawyer to check that the trust deed was OK. The friend told them that the lawyer’s specialty was asset structuring and so she could also help with making sure that they structured things correctly when helping their kids. Rick and Jessica really wanted to make sure that they would be helping their kids only and protecting their kids from the ramifications of any relationship split.

They made an appointment and took their trust documents in to see the lawyer. She said that some of the terms of the trust needed some tweaks because of the new Act, but she was mostly concerned with the power to appoint and remove trustees. She explained to them that most lawyers used precedents when they were preparing documents for clients, but sometimes those precedents weren’t carefully used and you could end up with unintended consequences. In their case, the precedent had been used in such a way, that their lawyer had the power to say who the trustees of the trust were.

The lawyer explained that sometime this may be OK; for example if they both died it may be appropriate for the independent trustee (in this case the lawyer) to be able to say who the trustees would be to retain some independence. However, in this case, the lawyer could actually say who the trustees would be now. This could become an issue if Rick and Jessica separated and the lawyer chose to remove one of them and side with the other. The lawyer kindly said that she thought this was a mistake in the trust deed, and not something which the lawyer who prepared it had intended to happen. However, she said that it was a good reminder for people to have a good review of their trust deeds to ensure that not only were they up to pace with the new Trusts Act 2019, but that there were no unintended consequences with a mis-use of a precedent.

The other issue with the power of appointment of trustees in Rick and Jessica’s trust was that it didn’t provide for what would happen if the person who had the power of appointment and removal of trustees loses capacity. As the population ages and life expectancies increase, lack of capacity is becoming more of an issue with trusts. Previously when life expectancies were lower, people often died before they lost capacity. These days, people are living longer, but physical health does not equate to mental health and more people are losing their mental capacity as they age. This can become a problem in trusts which don’t provide for that occurrence.

Even though there was a fundamental flaw in Rick and Jessica’s trust deed regarding who held the power to hire and fire trustees, there was also no provision for what would happen if that person lost capacity. Their new trust lawyer explained that this can be a real problem, and even though the new Trusts Act deals with how to remove an incapacitated trustee, it does not deal with what to do if the person who has the power to appoint and remove trustees loses capacity. If that happened, they may need to go to Court, depending on the circumstances.

The lawyer recommended looking to see if there was a power to vary the trust deed to make Rick and Jessica the people to have the power to appoint and remove trustees while they were alive, and further to provide for what would happen if one or both of them lost capacity. Fortunately there was the power to vary the trust deed in their trust. But the lawyer explained that there are many trusts which do not have the power to vary the terms of the trust and so people can be stuck with trust deeds that do not work as intended.

This story illustrates how important it is to understand the terms of your trust deed and make sure it says what you actually want it to say. Now is the perfect time to get expert specialised advice on what your trust deed actually says, and then a plan on how to fix it.  PN

PONSONBY PROFESSIONALS LOGAN GRANGER: MILEAGE REIMBURSEMENT RATES – WHAT YOU NEED TO KNOW

The Inland Revenue has just released its vehicle kilometre rates for the 2021 income year, and it’s not good news, particularly for employers who will need to quickly update mileage reimbursement systems for the new rates.

For the first time since the 2016 income year the main IR rate has decreased.

The rates are as follows:

The rates have come down because of lower fuel costs experienced because of Covid-19 and reduced interest and maintenance costs.

The IR kilometre rates are relevant in the following circumstances:

• Working out the amount of vehicle expenses a self-employed business person can claim,

• Working out the amount of vehicle expenses that can be claimed by a close company that meets certain criteria, in relation to vehicles provided to shareholder-employees, and

• Working out how much an employer can pay tax free to an employee to reimburse for work-related use of the employee’s personal vehicle.

Of course, self-employed people or employers are not required to use the IR kilometre rates; other methods are allowed, but the IR kilometre rates provide what is intended to be a simple, cost effective method of calculating these amounts.

As a reminder, the Tier 1 rates (which reflect the fixed and variable costs of running a vehicle) can be used for the first 3,500km of business travel, or the business portion of the first 14,000 of total travel in the vehicle. After these limits, the lower Tier 2 rates (which only reflect variable costs) apply.

We have written several articles in the past on the practical problems with the two-tier kilometre rate method in particular for reimbursing employees and suffice to say these still exist where employees are reimbursed for high levels of work related travel. If you’d like to refresh your memory on this method, we wrote about the practical issues with introduction of the two-tier system in August 2018, and updated it with new developments in September 2019.

WHAT DOES THIS CHANGE MEAN FOR YOU?

Self-employed and close companies If you are a sole trader or qualifying close company and use the kilometre rate method to claim business vehicle costs, this new rate applies for the 2021 year – the year ended 31 March 2021 if you have a standard balance date. The decrease in the rate will reduce the amount of vehicle costs you can claim when you file your 2021 tax return. If you have already filed your 2021 income tax return, and relied on the 2020 kilometre rates, then strictly speaking the amount of deductible vehicle expenses must be recalculated. Depending on the amount of the difference between the two amounts you will either need to request an amendment to your 2021 income tax return, or you may be able to self-correct the difference in your 2022 income return.

Employers If you are an employer and are reimbursing employees for work related travel, the reduced rates apply to reimbursements made from the date that they were issued – 27 May 2021 - and you need to review your reimbursement policy. When the rates have increased in the past, a lag in updating rates paid to employees, while potentially disadvantageous to employees, did not cause a PAYE problem. However, a decrease in the rates does require immediate attention.

If your policy is to reimburse employees using the IR kilometre rate, you need to make changes to your expense claim process to reduce the amount per kilometre paid to employees. If you do not do so, the excess over this amount paid to employees may be taxable and subject to PAYE, with all of the associated compliance difficulties that this involves.

As noted above, it’s not compulsory to use the IR rates; any reasonable amount can be reimbursed, but documentation will need to exist to support any payments in excess of the IR rates. If you have separately negotiated reimbursement rates with employees, you need to review these to determine whether the amount paid to employees could now be in excess of the updated kilometre rates allowed by IR. (LOGAN GRANGER)  PN

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.

JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz