While high-profile cases such as the Panama and Paradise Papers have contributed to the view that offshore Non-Charitable Purpose (NCP) trusts are primarily vehicles for illicit activities, there are legitimate commercial reasons Australian lawmakers should consider recognising them, says a University of Sydney business law expert.
NCP trusts are a type of trust that have no legal human beneficiaries but exist for advancing some non-charitable purpose, for example asset protection or estate planning purposes.
Currently, Australian law does not permit NCP trusts other than certain special exceptions, but they are prevalent in several offshore jurisdictions, such as Bermuda and the Bahamas.
In a new paper published in Australian Business Law Review, Dr Derwent Coshott from The University of Sydney Law School argues that, if implemented correctly, NCP trusts can be used to serve a useful, socially beneficial function and could potentially promote greater international investment in Australia.
“The central complaint against trusts in offshore jurisdictions is that they are used to avoid taxes and hide assets, with the significant media attention surrounding the revelations of the Panama and Paradise Papers contributing to this view. However, while there is this negative stigma attached to offshore jurisdictions as tax havens – and the intimate association of NCP trusts with them – there remain good, legitimate commercial reasons counting in favour of such structures,” Dr Coshott said.
He said Australia could allow for the establishment and recognition of NCP trust structures for commercial purposes that are regarded as economically beneficial, which would make Australia more competitive as an international financial centre in the Asia-Pacific region.
“The positive results of such reforms would be to enable better regulation of commercial activities that people are already engaging in internationally, while simultaneously rendering the Australian economy more competitive as a global financial centre, which is especially relevant in an increasingly globalised economy,” Dr Coshott said.
In the paper, Dr Coshott proposes a broad legislative model that would see assets held on trust for specific, legally-recognised purposes with enforcers, who are subject to fiduciary duties and appointed to check the management of these assets by trustees.
These enforcers might include the Attorney-General – who is the traditional enforcer of charitable trusts in Australia – or third parties. Dr Coshott said these enforcers would exercise their powers in the context of a legal framework.
“A governance framework would have the added benefit of providing a degree of governmental oversight and control of these structures, as only specific purposes would be recognised as valid, which would aid in relieving the fear often elicited regarding the use of offshore NCP trusts in illicit activities,” he said.