A rejig of laws around trusts may aid the Inland Revenue Department and others who challenge the use of the structures to shield assets, the Law Commission says.
The commission's review of trust law released yesterday recommends a new Trust Act which would clarify the role of trustees, who administer trusts and the property held within them, and the rights of beneficiaries in whose interests the assets are held.
Law Commissioner Sir Grant Hammond who led the review said there was confusion in the community about trusts, and the principle legislation dealing with them, the Trustee Act 1956 was, "sadly in need of modernisation".
"In parts it is unreadable.. outdated and convoluted.. We believe a new Trusts Act is essential."
Trusts were long used to shelter income from tax but that has happened less since the top personal and trust tax rates were aligned. Nevertheless the 2007 Tax Working Group estimated income sheltering using trusts cost the taxman about $300 million a year.
Law Commissioner Geoff McLay told the Herald courts were already able to determine whether trusts were being used for anything other than their stated purpose and effectively decide they didn't exist.
However that had had given rise to "some very confused case law".
A key recommendation in the review was that courts would be able to find that a trust had not been established and had no legal standing if the person who established it continued to manage the assets it held "as if they are their own personal property".
"We say that ought to be in the statute for clarity," Professor McLay said.
Clarifying the basic features and functions of trusts in the new Act, would "give a better structure to the courts they've been able to get to by themselves".
To the extent the new Act would better define trusts and how they worked, the it would help the IRD. Professor McLay said , but "does this give the IRD extra powers that they don't already have? The answer would be almost certainly no and that wasn't the intent here".
The commission said financial markets legislation dealing with trusts would take precedence over the new Trust Act but because the overlap was not comprehensive the new Act and existing legislation would remain the "backstop for financial instruments structured as trusts".
Sir Grant said the commission would continue to look at more specialised areas of trust law, such as charitable and other specialised trusts and the use of companies and other corporates as trustees.
Justice Minister Judith Collins said the Government would formally respond to the recommendations in March next year.
The Auckland District Law Society spokeswoman Catherine Atchison said with trusts being a common way to manage property and other assets the society estimated the proposals would affect at least a million New Zealanders.
"With an estimated up to 500,000 trusts, New Zealand has one of the highest numbers of trusts per capita in the Commonwealth", she said.
"The proposed changes are of great benefit to all parties involved in a typical trust and will have a fundamental impact on the management and establishment of trusts for decades to come."