Contents

Chapter 7
Investment

Apportionment of receipts and outgoings

RECOMMENDATION

R16 The new Trusts Act should provide that:
(1) A trustee may:
(a) apportion any receipt or outgoing in respect of any period of time between the income and capital accounts, or charge any outgoing or credit any receipt exclusively to or from either income or capital as the trustee considers to be fair and reasonable in all the circumstances and in accordance with accepted business practice;  
(b) transfer funds between capital and income accounts to recover or reimburse an outgoing previously charged to the account that is to receive the funds where such corrections are fair and reasonable in all the circumstances and are undertaken in accordance with accepted business practice;  
(c) transfer funds between capital and income accounts to recover or deduct any receipt previously credited to the account from which the funds are to be recovered where such corrections are fair and reasonable in all the circumstances and are undertaken in accordance with accepted business practice; and  
(d) deduct from income an amount that is fair and reasonable in all the circumstances to meet the cost of depreciation, and add the amount to capital, in accordance with accepted business practice.
(2) Subject to (5) below, the trustee’s powers under (1) above should replace the traditional rules concerning apportionment between capital and income, and those traditional rules are abolished.
(3) The trustee’s powers under (1) above should apply to all trusts established before the date on which the new Act comes into force despite anything to the contrary in the terms of the trust.
(4) In relation to trusts established on or after the date on which the new Act comes into force, (1) above should be a default provision that applies unless it is modified by the terms of the trust.
(5) The apportionment rules in the Property Law Act 2007 will continue to apply where the trustee is the landlord, tenant, vendor or purchaser of land.

Complex rules on apportionment

7.24The current default rules on apportionment are complex and difficult to apply. Apportionment under them depends on whether a particular receipt or expense is correctly classified as income or capital. Generally, expenses of an income nature are borne by income beneficiaries while expenses of a capital nature are borne by capital beneficiaries. However, the case law rules also depend on other factors, such as for whose benefit the expense was incurred, to determine expense apportionment.210

7.25Most modern trust deeds now contract out of the traditional rule and simply enable trustees to exercise discretion on apportionment. If the trust deed is silent then trustees must apply the traditional rules. In addition to the case law rules, there are a number of specific provisions in the Trustee Act that deal with apportionment in certain situations. Section 83, for example, contains special rules as to apportionment on purchase, sale or transfer of fixed income assets and shares in certain situations.

7.26Due to their complexity the current rules can result in uncertainty. It may be difficult for a trustee to assess who benefited from a particular expense and apportion it correctly. In some cases apportionment also causes inconvenience and expense because it requires complex calculations of very small sums of money.211

Trustees’ discretionTop

7.27The Commission recommends moving completely away from case law rules and giving trustees the power to exercise discretion to determine how to apportion receipts and expenses. Logically trustees should also be permitted to change their minds subsequently or correct mistakes. The recommendations also address depreciation to ensure that income beneficiaries are not unduly favoured due to a failure to allow for depreciation.

7.28Again, it should be noted that the recommendations do not in any way alter the tax status or liability that attaches to any receipt or outgoing. The reforms give trustees discretion as to how they apportion outgoings and receipts for the purposes of trust law without breaching their obligations as trustees. That would not affect the treatment of those receipts and outgoings for tax purposes.

7.29The recommendation requires that the allocation of receipts and outgoings is undertaken in accordance with accepted business practice. The New Zealand Law Society and some other submitters considered that some guidance on what constitutes accepted business practice in this context could be helpful. Some submitters proposed that trustees should have to comply with “generally accepted accounting practice” reporting standards promulgated by the External Reporting Board under the Financial Reporting Act 1993. However, we were not persuaded that prescriptive financial reporting standards should necessarily be trustees’ only guide.

7.30Our recommended reforms also replace section 83 and other provisions containing special rules relating to the apportionment of receipts and outgoings between income and capital. Sections 83, 84 and 85 of the Trustee Act need not be carried forward into a new statute. They are obscure, difficult to apply and can result in impractical outcomes. Instead, we propose that trustees should be able to allocate or apportion receipts and outgoings justly and equitably in these circumstances.

7.31While we have recommended that the traditional rules concerning apportionment between capital and income be abolished in this context, we have clarified, in response to points raised by submitters, that the apportionment rules in the Property Law Act 2007 should continue to apply where the trustee is the landlord, tenant, vendor or purchaser of land.

Application to existing trustsTop

7.32In the Preferred Approach Paper we proposed that our approach to apportionment should apply to existing as well as new trusts regardless of whether any contrary provisions have been included in the trust instrument.212 While one submission questioned why the proposed reform should be a mandatory position, most submitters who commented expressed support for a simple new rule giving trustees discretion.

7.33We continue to favour an approach that gives all trustees discretion over apportionment. We recommend that the traditional rules governing apportionment should be abolished and that the reforms should apply to all existing trusts. Instructions on apportionment included in existing trust deeds would guide rather than overrule the new provision giving trustees discretion. Trustees would always need to exercise discretion and apportion receipts and outgoings fairly and reasonably in the circumstances ensuring that their actions accord with accepted business practice.

7.34However, going forward we think the new provision should be a default one. Against the backdrop of the new default provision, which gives trustees discretion over apportionment, settlors should be free to modify the new rule. We think it unlikely that settlors would wish to do this, but the principle of settlor autonomy means that the option should be available.

7.35Given the important links between R15 in respect of the distinction between capital and income and R16 in respect of apportionment, the new provisions giving effect to R15 should also apply to existing trusts and to new trusts in the way discussed here also.

210A Modern Trustee Act for British Columbia, above n 205, at 53.
211Capital and Income in Trusts, above n 209, at 9.
212Preferred Approach Paper, above n 200, at [5.41]−[5.44].