Increased tax disclosure rules for trusts

In the wake of the Trusts Act 2019 coming into effect, trustee compliance obligations are set to increase yet again with the introduction of additional tax information disclosure requirements.

With effect from the 2021-22 income year, trustees will need to provide Inland Revenue with additional financial and non-financial information relating to a trust and its activities. This is intended to equip Inland Revenue with the information it needs to monitor compliance with the new 39% personal tax rate.

The new disclosure requirements were introduced as part of the Taxation (Income Tax Rate and Other Amendments) Act 2020, available here.

Who does it apply to?

The stepped-up disclosure requirements will have wide application, covering both existing and new trusts (with some exceptions). While the compliance burden will ultimately fall on trustees, the nature of the information required by Inland Revenue means that settlors and beneficiaries may also be interested in understanding the changes.

New Zealand resident settlors may also find themselves responsible for the performance of obligations where the trustee of a trust is a non-resident.

What is changing?

With effect from the 2021-22 income year onwards, trustees will need to provide Inland Revenue with the following additional information:

  • a statement of profit or loss and a statement of financial position for the trust;
  • the amount and nature of each settlement made on the trust in the income year;
  • the name, date of birth, jurisdiction of tax residence, tax file number and taxpayer identification number of each settlor who makes a settlement on the trust in the income year or whose details have not been previously provided;
  • the name, date of birth, jurisdiction of tax residence, tax file number and taxpayer identification number of each person having a power under the trust to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust;
  • for each distribution made by the trustee of the trust in the income year –
    • the amount of the distribution; and
    • the name, date of birth, jurisdiction of tax residence, tax file number and taxpayer identification number of the beneficiary receiving the distributions; and
  • any other information required by the Commissioner.

The Commissioner is also empowered to request this information from a trustee in respect of earlier income years – potentially as far back as the 2013-14 income year.

Exceptions are provided for trustees of non-active trusts and trusts already required to make a return as “foreign trusts”, as well as those trustees that are incorporated as a charitable trust board or eligible to become a Maori authority.

Our view

Given the extremely broad nature of the information to be disclosed, and the additional powers granted to the Commissioner, it is evident that Inland Revenue has a renewed interest in trust arrangements following the introduction of the 39% personal tax rate.

New Zealand trustees and settlors should be aware of this heightened focus and should take steps to ensure that any transactions entered into (or settlements made) withstand potential Inland Revenue scrutiny.

It is also worth noting that this information gathering process has a secondary purpose – in addition to ensuring compliance with the 39% personal tax rate, Inland Revenue is looking to understand and monitor the use of structures and entities by trustees over time. Future tax policy is likely to be informed by the results of this exercise, with further trust related charges being possible.

Changes to the scope of the rules are also possible, with commentators arguing for the inclusion of additional exclusion categories (such as for all trusts registered under the Charities Act 2005).

What next?

The disclosure requirements will apply from the 2021-22 income year onwards. With this in mind, trustees should:

  • pre-emptively consider the disclosures they will need to make and how they will collect the required information; and
  • consider how a disclosure request in respect of an earlier income year would be met and whether any financial or other records should be brought up to date.

Certain trustees may also wish to look at whether they are eligible to be excepted from the disclosure rules by making a non-active trust declaration. This approach could be considered for those trusts that do not derive income or have deductible expenditure, such as trusts established to simply hold the family home.

If you have any questions in relation to how the additional disclosure requirements may affect your trust, please contact one of our experts.

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