With the implementation of the new Trusts Act in January 2021 and the increase in the top personal income tax rate to 39%, IRD has been working on new domestic trust disclosure requirements for the last 18 months. They have stated that "they are exercising their powers to gather additional information from trustees to gain insight into whether the top personal tax rate of 39% is working effectively and to provide better information to understand and monitor the use of structures and entities by trustees". However, it is important to note that they may also use this information for compliance and audit purposes so the jury is still out on the exact impacts of this additional information.
These disclosure requirements come into effect for the 2022 income year and IRD finally released details of what would need to be disclosed in March 2022 so we are all playing catchup to ensure that we have the information that needs to be included in returns.
Who do the new rules apply to?
If you have a domestic trust that derives income of any kind, the new disclosure rules apply to the trust.
If you have a trust that meets the non-active trust requirements, then you must advise IRD that the trust is non-active and you will be excluded from the new reporting requirements. To be non-active, a trust must broadly meet the following conditions throughout the income year:
Has not derived any assessable income;
Has no deductions;
Has not been party to, or perpetuated, or continued with, any transactions with assets of the trust that give rise to income or deemed income in any person's hand or fringe benefits to any employee or former employee.
However, in determining whether a trust meets these requirements, the IRD has stated that the following should not be included:
reasonable fees paid to professional persons to administer the trust;
bank charges or other minimal administration costs totalling no more than $200 per tax year;
interest earned on trust bank accounts during the tax year, as long as the interest income does not exceed $200; and
insurance, rates and other expenditure incidental to the occupation of a dwelling owned by the trust and incurred by the beneficiaries of the trust.
If at any time the trust no longer meets these requirements, IRD must be notified and the trust will be subject to the reporting requirements.
This means that any trusts that solely own the family home and do not earn any income will continue to be non-active trusts and the trustees do not need to comply with the new reporting requirements as long as a non-active trust declaration is filed with IRD.
So the rules apply to your Trust ... What do you have to provide?
If you are required to file an income tax return then the new reporting rules apply to your trust and the following information must be prepared and provided to IRD:
Financial statements in accordance with the minimum requirements prescribed by the Tax Administration (Financial Statements - Domestic Trusts) Order 2022 must be prepared;
Details of anyone who has the power to appoint or dismiss a trustee, add or remove a beneficiary, or amend the trust deed.
Details of anyone who is a settlor of the trust - Note that the definition of settlor for income tax purposes is wide ranging;
The amount and nature of any settlement made during the year, and the details of the person who made the settlement;
Details of any beneficiary who has received a distribution during the year, the amount and nature of the distribution and any movements in the beneficiaries account.
This might seem like a relatively simple list, particularly in respect of the first requirement for financial statements as much of the information that needs to be disclosed in your return will likely be in the financial statements you already prepare. However, the requirements of the other 4 points are very broad and require a lot of information that has not been provided previously.
Power of Appointment
The disclosure requirements require the full details of any person that holds the power to appoint or dismiss a trustee, add or remove a beneficiary or amend the trust deed. You are required to provide the following information for each Appointer:
Full Name;
Date of Birth;
IRD Number or Tax Information Number;
Jurisdiction of Tax Residence; and
Date Power of Appointment received (or a best estimate if not specifically available).
It is only necessary to provide this information for those holding this power in the 2022 income year and any subsequent changes. This information is not provided in the tax return but through a separate return.
Settlors and Settlements
A settlor is usually considered to be the person or entity that creates, establishes, settles or declares a trust. The simplest interpretation of this is that the Settlor is the person named as such in the Trust Deed.
However the definition of a settlor for income tax purposes is far more wide ranging in New Zealand. The definition of a settlor in the Income Tax Act 2007 includes a person who transfers value to the trust, provides services for less than market value or provides financial assistance or a beneficiary with a current account of more than $25,000 where interest is less than the prescribed rate or the market rate.
This means that anyone that meets the Income Tax Act definition of a settlor at any time during the life of the trust will need to have their details disclosed in the 2022 and subsequent income tax returns. The following information must be provided for all settlors (including historical settlors that made settlements prior to 1 April 2021):
Full Name;
Date of Birth;
IRD Number or Tax Information Number;
Jurisdiction of Tax Residence; and
Details of nature and amount of settlements (only for settlements from 1 April 2021 onwards).
Beneficiaries and Distributions
Prior to 1 April 2021, a beneficiary's details were only provided to IRD if they received an income distribution that was taxable. Under the new requirements, it is now necessary to provide full beneficiary details for any distribution and the definition of distribution includes:
Income distributions (ie income of trust distributed to the beneficiary);
Capital distributions (ie non-taxable distributions to the beneficiary);
Transfer of physical and intangible assets of the trust to a beneficiary;
Beneficiary using trust property for less than market value; and
Beneficiary supplying goods or services to the trust and receiving more than market value in return.
If a beneficiary receives a distribution from the trust in the 2022 or subsequent income years, the following information must be included in the income tax return:
Full Name;
Date of Birth;
Address;
IRD Number or Tax Information Number;
Jurisdiction of Tax Residence;
Details of nature and amount of distributions (only for distributions from 1 April 2021 onwards); and
Reconciliation of movement in the beneficiary current account.
So what does this all mean?
The reality is that if you have a trust that needs to file an income tax return, preparation of this year's return is probably going to be a lot more painful for the trustees as we gather all the information that needs to be disclosed to IRD. This is made even harder by the late release of the specifics of the disclosure requirements which means we are on the back foot in terms of making sure that everyone collects the information required as we progress through the year. It is also likely that IRD advice on providing this additional information will evolve over the next 12 months as they start to receive data from taxpayers and identify common issues with returns being filed.
With all that done and said, we believe that this is a really good opportunity to critically look at your trust to see if you still need it and if you do, undertake a full review of the trust to ensure that you are covered both from the perspective of the Trusts Act 2019 and the new Trust Disclosure Requirements. Our Trust review process will make sure that your Trust is still appropriate and your record keeping is robust enough to meet all these requirements.
Get in touch with the team at Thrive CA if you have a trust that needs to be reviewed or you need help with meeting the disclosure requirements.