Why does the NI/VL discretionary trust deed include powers to do things that may not be tax effective?

The trust deed has an array of powers that are deliberately permissive, rather than prescriptive (see the separate FAQ explaining this further).

Some powers may from time to time be seen by the Tax Office as not being effective for tax purposes; for example streaming primary production income.

The reasons we adopt this drafting approach are broadly as follows:

  1. The drafting approach creates an option, not an obligation.
  2. While the Commissioner’s view is that (for example) streaming primary production income is ineffective for tax purposes, that view is not necessarily correct – and could be proven to be so one day – or the rules might change.
  3. In any event, the approach is effective for trust law purposes.
  4. In our experience, trusts are rarely set up solely as tax tools – they operate under trust law and need to do what trust law permits.
  5. While the tax consequences of a trustee’s actions might be determined with reference to the tax law, that is something that a trustee should take advice on once they have considered how they will exercise their fiduciary obligations as a matter of trust law.
  6. To suggest something might be ineffective for tax planning purposes if the trustee takes a particular action permitted by the trust deed is not a reason to exclude it from the deed.
  7. As the deed permits an array of actions that either now, or in the future, may have adverse tax consequences and therefore it is always best for clients to get specialist advice as appropriate.

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