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Choosing A Business Structure is one of the most important considerations before you proceed with any of your business plans in New Zealand. Your business structure must align with your long-term goals and strategies. For instance, you’d need to contemplate:
- What is my long-term plan?
- How much can I afford to invest?
- How do I plan to raise capital?
- Who will be joining me in this venture?
- What kind of business am I operating?
- How complex are my business activities?
- What is the level of risk involved?
- What are my tax obligations in New Zealand?
When you think of a business structure, you might be considering a company or a partnership (you can read about this here). But when might you need a trust?
A trust involves managing a business’ assets and distributing its income for someone else’s benefit. It can be complex and costly to set up, but it offers several advantages. If you’re considering a trust business structure in New Zealand, this article covers everything you need to know.
What Is A Trust?
In general terms, a trust is a legal arrangement where property is held by one party for the benefit of another. This means the trustee (the person managing the property) must handle it in a way that benefits the beneficiary (the person receiving).
There are typically three main parties involved in a trust:
- Trustee – this is the person or legal entity (e.g. a private company) that is responsible for managing the trust according to the terms outlined in the trust deed.
- Beneficiary – this is the person or people receiving the benefit of the trust, such as income.
- Settlor – this is an unrelated third party who establishes the trust by signing the trust deed and providing the initial settlement sum.
In the context of business structures, a trust allows the trustee to manage the business for the benefit of the beneficiary or beneficiaries. The trustee has legal ownership and control of the business’ property and other assets, which will eventually be passed on to the beneficiary. They also have a duty to act in the best interests of the beneficiary.
You may consider a trust if you’re thinking about how to manage shares in your business – we’ve written more about this here.
What Types Of Trusts Are There In New Zealand?
In New Zealand, there are two main types of trusts you can establish:
- Discretionary trusts
- Unit trusts
Discretionary Trusts
A discretionary trust gives the trustee the power to decide who receives distributions from the trust. The trustee’s discretion is guided by the trust deed, which should be drafted with the assistance of a legal professional.
Discretionary trusts are commonly used in family businesses in New Zealand.
Unit Trusts
Unit trusts distribute income or property to beneficiaries based on the number of units they hold. Each unit represents a share of the trust’s income or property to which the beneficiaries are entitled.
Think of these units as similar to shares in a company.
| Example Imagine you’ve started a tech company called Innovate NZ Ltd. You want to distribute shares to various stakeholders, and your business partners want to be beneficiaries. A unit trust could be appropriate here. You have two business partners, and you decide to allocate units based on their involvement. Partner A receives 60 units, while Partner B receives 40 units. These units represent the share of the trust’s income or property they are entitled to. |
Like any business structure, trusts have their pros and cons.
Advantages Of A Trust
- Asset protection: Assets are protected from legal action against the beneficiary, as the trustee holds the property.
- Flexibility: Trusts can be a flexible structure for tax planning and distribution of income.
- Estate planning: Trusts can help manage estate issues and protect assets from claims such as bankruptcy.
- Privacy: Trusts in New Zealand do not have to disclose financial information publicly, offering greater privacy.
Disadvantages Of A Trust
- Complexity: Establishing a trust can be complex and requires legal expertise.
- Cost: There can be significant costs involved in setting up and maintaining a trust.
- Regulation: Trustees must adhere to the terms of the trust deed and are regulated by the Trusts Act 2019.
- Liability: If the trustee is not a company, they may be personally liable for the trust’s debts.
- Taxation: Trusts cannot distribute losses, and profits may be taxed at higher rates.
How Can I Set Up A Trust For My Business In New Zealand?
Setting up a trust in New Zealand involves several steps:
- Choose a trustee, which can be an individual or a corporate entity. If it’s a company, the trustee benefits from limited liability.
- Engage a lawyer to draft a trust deed.
- Have the trust settled by a settlor.
- Pay any relevant duties to the Inland Revenue Department.
- Apply for an Inland Revenue Department (IRD) number.
- Open a bank account for the trust, depositing the settlement sum first.
After establishing a trust, you must manage it properly, including distributing income to beneficiaries as required.
Additional responsibilities may include:
- Registering for Goods and Services Tax (GST) if the turnover exceeds the threshold.
- Understanding the tax implications of distributions according to the trust deed.
- Contributing to the KiwiSaver accounts of employees, if applicable.
For more detailed information about setting up a trust in New Zealand, consult with a legal professional or visit the New Zealand Companies Office website.
What Is In A Trust Deed?
A trust deed in New Zealand typically includes:
- The names of the beneficiaries
- The trustee(s)
- The entitlements of the beneficiaries
- The method of distribution/payment
- The object of the trust
- The signature of the trustee
- An exit clause for dissolving the trust
It’s crucial to have a trust deed drafted by a lawyer to ensure it meets all legal requirements.
Anything Else?
If you’re uncertain whether a trust is the right structure for your business, you might also consider other structures such as a sole trader, partnership, or company. Each has its own set of benefits and drawbacks, so it’s important to evaluate them in light of your specific circumstances and business objectives.
If you decide to pursue a trust business structure, consulting with a lawyer is advisable to ensure compliance with New Zealand law.
Sprintlaw has a team of lawyers who can assist you. You can reach out to us at [email protected] or contact us on 0800 002 184 for a free, no-obligation chat.
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