Income Tax Returns and declaration of sources of foreign income

1240/5(3020)

WRITTEN QUESTION TO THE MINISTER FOR TREASURY AND RESOURCES BY DEPUTY G.P. SOUTHERN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY, 10th OCTOBER 2006

Question 1

Further to his written and oral answers on 26th September 2006, would the Minister inform members whether –

1. the practiceoutlined in part (a) of his written answer not to declare such interests and sources of foreign income' (suchas foreign trusts) on a Jersey Income Tax Returnconstitutes tax evasion and would render a Jersey resident liable toprosecution?
2. the additional clause concerning Settlor Reserved Powersin the TrustLaw, even if it creates no new motives' for avoidanceor evasion in the Minister'sview,gives greater certainty to both the settlor andthe trustee that such reservations are acceptable practicein Jersey in termsof tax avoidance?
3. the introduction ofreserved settlor powersisdesigned so that Jersey can bettercompete for the ultra high net worthend of the marketfor international tax avoidance through trusts?
4. Jersey TrustLaw can nowbe used by Jersey residents toavoid tax by setting up trusts with reservedpowers using, say, Guernsey trustees?

Answer

1. It would constitute tax evasion in thecaseof a life interest or a bare trust but not in the caseof a discretionary trust as in the latter the beneficiary would have noautomatic entitlement toincome whereas in the former the beneficiary would be entitled to both income and capital unhindered. TheComptrollerofIncome Tax has prepared prosecution files in 8 tax evasion casesin the last13 years in respect of fraud, allofwhichwere successfully prosecuted in the Royal Court by Her Majesty's Attorney General.The facts andcircumstances of eachcase are carefully considered before a decision ismade to prepare a prosecution in any particular case. However, in tax avoidancecases the Comptroller does not need to prepare a prosecution file ashe invariably settles such casesunder Article 134A.
2. The Deputy fails to appreciate that the TrustsLawis not a law relating to taxation. The Trusts Lawsimply provides that if a settlor reserves certain powers that will not invalidate the trust. It brings greater certainty of legal outcome in disputestothe settlor and trustee in relation to the Trusts Law,butmakesno reference to taxation legislation and hasno bearing on such legislation. The Comptroller will consider the facts and motives in all caseswherehe is suspicious that a transaction – including the creation of a trust - may be primarily motivatedbythe desire to avoid tax, in the samemannerashedoes for all the othercaseshe currently counteractsunder Article 134A,thegeneralanti-avoidanceprovisionin the IncomeTaxLaw.
3. The introductionof settlor reserved powers has nothing todo with tax avoidance –international or otherwise. Indeed, if a settlor does reserve certainpowers – such as the power to revoke a trust ortoaddhimselfas a beneficiary – this couldgiveriseto a tax liability for the settlor. So tax avoidancein this context not the relevant issue.

T h e aim of the powers is to bring certainty – in statute - to the practice of reserving powers in the same way that many other jurisdictions have already done.  In particular, the powers are aimed at settlors who may have earned significant wealth in specialised areas – for example hedge fund management – and who wish to continue managing the assets that are placed in the trust, rather than pay trustees or another specialist investment manager for a service they wish to carry out themselves. That selection will also give protection

to the Trustees in the event of any later claims by beneficiaries for non-performance in the relevant field (in

this example investment management) as the Trustees would not have had responsibility for this activity in

relation to the trust assets from the outset of the relationship.

4. It is not assimple a matter as the Deputy outlines. In somecases the taxavoidanceachievedthroughusing a trust structure isquite legitimate, in the sameway that tax avoidance is legitimate whenonetakesout a mortgage that qualifies for tax relief,orwhenonejoinsan approved occupational pension scheme and the contributions into that scheme qualify for tax relief. So if the settlor is a Jersey resident and forms a trust for the benefit of his grandchildren outof natural concern fortheirwell-being, then that may very well be a legitimate meansof avoiding tax, despite the fact that the investedassets,which were previously in hisown name, have now been settled ontrustfor the benefit of his grandchildren,whetheror not the trust isone set up in Jersey, Guernsey or any other jurisdiction.

Question 2

Will the Minister inform members whether under the Trusts (Jersey) Law 1984, as amended –

1. a Jersey trust is nowrevocable even when the trust deed states that itis not?
2. a Jersey trust deed can beamended by the settlor, to the extent that the settlor maybecome the beneficiaryby a residencyclauseor similar?
3. a trustee can now bedismissedby the settlor thus removing protection from the beneficiary? Answer

1. No.If a trust deed says it is irrevocable it is irrevocable.
2. If the settlor of a Jersey trust retains anunlimitedpowerto add orremove beneficiaries, he mayaddor remove himself as a beneficiary. This is the existing position and is possibleunder the existing trust law. The Trust law amendment only changes this to theextent that itis recognised by statute rather than a matter of practice. Thisin turn makescourt adjudication in the eventofbeneficiary claims more straightforward.
3. If a settlor reserves the power to changetrusteeshemay exercise that power.Itisnotclearhow such a power removes protection from the beneficiary: it shouldberemembered that before a settlor creates a trust the beneficiary hasno rights to the assets that are being placed in a trustat all. ThepowertochangeTrusteesis also possibleunder the existingtrustlaw.

These three questions could have been answered by a simple cursory reading of the Law, and I am surprised that they are being raised some six months after the Law was overwhelmingly approved by the States.

Question 3

In an e-mail dated 14th September 2006 the Director – International Finance wrote that if the discretion of the trustee is fettered (at present) there is a risk that the trust could subsequently [be] attacked as a sham. For an international client, these are reasons not to use a Jersey trust'. Would the Minister state whether he concurs with this statement and, if not, why not? Will he estimate for members the scale, if any, of such risk?

Answer

The questioner fails to appreciate that international clients want certainty. They do not want to place their assets into a vehicle in the knowledge that those assets may be spent fighting legal battles. For example, a wealthy settlor wishes to put most of his assets in trust for two of his three children. For whatever reason, he does not want the third child to be a beneficiary. When the settlor dies, the third child will, in general, take every action he can to attack the trust. The reason for this is not because there is something wrong with the trust, but because the spurned child has nothing to lose. He will use every argument to attack the trust and one of those arguments will often be that the trust is a sham, because the discretion of the trustees has in some way been fettered. In fact, because settlor reserved powers clarify the relative responsibilities and duties more clearly from the outset, the grounds on which the trust can be be attacked as a sham are diminished rather than augmented.

The general view is that, under existing Jersey Law, a settlor can already retain certain powers without a trust being a sham. To re-emphasise the point, the purpose of the amendment is simply to bring greater certainty to this area by recognising it in statute rather than relying on the court to adjudicate it as a matter of practice, case law etc.

So, to directly address the question, there is always a risk that a Jersey trust will be attacked by a disgruntled person, and one of the traditional grounds for attack is that it is a sham. It was this situation that was recognised by the e-mail referred to dated 14th September 2006. If the trust has been prudently drafted and correctly operated, these attacks will very rarely be successful.  However, even unsuccessful attacks must be defended, and settlors prefer not to establish structures if there is a risk that the assets placed in those structures will be spent on lawyers fees defending the structures from attack. The fact that the defence is likely to be successful is little comfort.

Accordingly, investors prefer to go to one of the many jurisdictions – both onshore and offshore - that have given statutory certainty to settlor reserved powers. Jersey is thus following the increasingly common international practice in this area rather than, as the question seems to seek to imply, breaking new ground on its own. A key purpose of the amendment is to discourage speculative and groundless attacks on Jersey trusts and thus increase confidence that settled assets will not be spent defending nuisance litigation.