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17 Dec 2015
Appeal Status
Not appealed

Liability for PAYE: Were the shares held on bare trust?

2015 case note - whether the disputant liable to pay PAYE on monthly payments - bare trusts, shareholding, s RD 3, s YB 21.

TRA 022/14 [2015] NZTRA 22

Income Tax Act


This case was about whether the disputant was liable to pay PAYE on monthly payments made to Mr X. The disputant argued that Mr X was a shareholder of the disputant and therefore the disputant was not required to return the PAYE owing as the monthly payments were not PAYE income payments to Mr X. Deciding whether Mr X was a shareholder of the disputant turned on whether Mr A (sole registered shareholder of the disputant) held shares in the disputant for Mr X on bare trust.


In determining whether a bare trust exists, the Taxation Review Authority ("the Authority") looked into the powers and obligations of the person who claimed to be a bare trustee. In this case, Mr A's powers to transfer the property exceeded those of a bare trustee. Mr A also did not consider himself to be under any obligation to transfer the property when asked to do so.


The Commissioner of Inland Revenue (“the Commissioner”) assessed the disputant for PAYE for 38 periods between February 2007 and March 2010 on the basis that the disputant failed to account to the Commissioner for PAYE from monthly payments (“the Monthly Payments”) made to Mr X.

The disputant contended that the Monthly Payments were not subject to PAYE as Mr X was a shareholder-employee. Mr X was not a registered shareholder of the disputant (Mr A was the registered shareholder of all the shares). However, the disputant asserted that Mr X held a 30% shareholding with the disputant as a beneficiary by way of a bare trust arrangement, with Mr A holding the shares on a bare trust.


The two issues for determination by the Authority were whether Mr A held the shares as a bare trustee on trust for Mr X and, if so, whether the Monthly Payments made to Mr X were excluded from being taxable under s RD 3(2) of the Income Tax Act (“ITA”).

There was no dispute between the parties as to the relevant law.

Section RA 5 of the ITA requires employers to withhold tax and pay PAYE. Section RD 3(1)(b)(ii) provides that the PAYE rules apply to a PAYE income payment which does not include an amount to a shareholder-employee in the circumstances set out in s RD3(2). Section YB 21(1) of the ITA states that if a person holds or does something as a nominee for another, the other person is to be treated as holding or doing that thing and the nominee is ignored. Section YB 21(2) of the ITA provides that a trustee is only a nominee if the trustee is a bare trustee.

Judge Sinclair, in considering the meaning of a bare trustee, referred to Halsbury’s Law of England (5th ed, vol 98 at 195) which stated:

  • … A bare trustee has been defined as a person who has himself no present beneficial interest in it and no duties to perform in respect of it except to convey and transfer it to persons entitled to hold it, and he is bound to convey or transfer the property accordingly when required to do so.

She also referred to Hedergen v Federal Commissioner of Taxation (1998) 84 ALR 271 at 281, in which Gummow J distinguished between passive and active trusts and Burns v Steel [2006] 1 NZLR 559 at [62], in which Randerson J observed that it is not enough that the description of “bare trustee” is used.

Judge Sinclair moved on to consider the requirements to create a valid express trust: certainty of intention, certainty of subject matter and certainty of object.

Issue 1: Were the shares held in the disputant pursuant to a bare trust?

Judge Sinclair first considered the Deed of Declaration of Trust dated 21 December 2006 that Mr A executed and which provided:

  • The Trustee shall at all times deal with all matters at the direction of [Mr A] and shall when called upon or when the Trustee so wishes whichever shall be the earlier transfer the shareholding of the Company…

Judge Sinclair found that Mr A as trustee was not acting simply as a bare trustee for Mr X but had powers to transfer the property which exceeded those of a bare trustee. Mr A as trustee had power to “deal with all matters” at the direction of himself and retained the power to transfer the shares at his own discretion without any demand from the beneficiaries.

Judge Sinclair noted that the Deed of Trust referred to the disputant as “to be incorporated” and then considered the issue around “certainty of subject matter”. The shares described in the Deed of Trust were B class shares but the shares issued by the disputant were all ordinary shares. Judge Sinclair did not consider that it can be said that the shares described in the Deed of Trust are clearly identifiable as those subsequently issued by the disputant.

Judge Sinclair also referred to Mr A’s evidence that Mr X gave valuable consideration for the creation of the trust and the submissions that the Deed of Trust formed part of the consideration (which was described as being part of the oral agreement reached by Mr A and Mr X in 2006). Judge Sinclair was not satisfied that there was any oral agreement pursuant to which Mr X waived his rights under a Heads of Agreement dated 9 January 2006 and noted that there is no evidence that Mr X agreed to the shares being held on trust or had knowledge of the existence of the Deed of Trust.

Judge Sinclair did not accept the disputant’s contention that while Mr A had been in breach of his duty as trustee in not transferring the shares, this did not mean that he was not holding the shares as a bare trustee pursuant to the Deed of Trust, and found that Mr A is not a bare trustee under the Deed of Trust or, in the alternative, the Deed of Trust is not valid and enforceable.

Having considered the communication between Mr A, Mr X and their advisors and Mr A’s affidavit (sworn on 25 January 2011 in support of a notice of opposition to Mr X’s originating application to rectify the share register) in which Mr A states that the transfer was conditional on an appropriate mechanism being finalised dealing with the control of the companies and protection of the shareholders, the Authority was not satisfied that Mr A held the shares on trust for Mr X as a bare trustee.

As Mr A was not holding the shares in the disputant as a bare trustee, s YB21 of the ITA cannot apply to deem Mr X to be a shareholder of the disputant. As a result, the amounts paid to Mr X were PAYE income payments under s RD 3(2)(b)(ii).

As Judge Sinclair found that Mr A was not holding the shares as a bare trust, it was not necessary to consider the second issue.

The Authority dismissed the challenge and confirmed the Commissioner’s assessments.