Are you ready for the new Trust Disclosure Rules?
Tax Alert - March 2021
By Joanne McCrae
With the move to the 39% tax rate for individuals, close scrutiny is going to be put on transactions between individuals and trusts. This includes harsh new disclosure rules designed to ensure the Inland Revenue has clear visibility over such transactions whether they are taxable or not.
In the past, trusts have filed returns declaring taxable income including distributions to beneficiaries that are subject to NZ tax. However they have not been required to file financial statements, nor provide details of transactions which are not subject to tax. This is to change from the 2022 tax year (from 1 April 2021 in most cases) with trusts being required to prepare IRD minimum standard financial statements and to make significant other disclosures. These include:
- Details of all settlements on the trust which includes all transfers of value along with full details identifying those entities or individuals making the settlements. Transfers of value include all things monetary and non-monetary other than the value of minor services provided at less than market value.
- Details of all distributions (whether taxable or not; monetary or non-monetary) including details identifying the recipients.
- Details identifying those who have the power to appoint or dismiss a trustee, add or remove a beneficiary, or to amend the trust deed.
- Any other information required by the Commissioner.
This provides a large increase in compliance for trusts in that a lot of this information is not always readily available. The first year will be particularly challenging and trustees should be starting to think about how to collect this information.
Aside from the difficulty of collecting the information required, it is important to recognise that Inland Revenue will be able to identify ways in which individuals benefit from trusts other than through taxable beneficiary distributions. It is clear from public statements made by the Minister of Revenue that if they see a systemic use of trusts to fund annual income by way of capital distributions from income taxed at the lower trust tax rate of 33%, serious consideration will be given to raising the trustee tax rate to 39% to match individuals (noting though that this will likely apply to the first dollar of income).
The consequence of trusts having a higher tax rate in the future has material implications to the way trusts have typically been used for asset planning and creditor protection. This in itself is something all individuals with trusts should want to avoid.
However there are other implications of these trust disclosure rules. This information will then be available for sharing under International Exchange of Information Agreements with foreign tax authorities. Often non-taxable transactions have flown under the radar and trustees may have had interest free loans or capital transactions with foreign beneficiaries that have not been taxed in their country of residence and for which little thought has been given. All trustees and beneficiaries should expect this information to be freely available to the foreign tax authority as the identifying details of beneficiaries will include their tax residence and tax file numbers. There is increased interest in this worldwide and you can expect revenue authorities to be keen to review this information and identify those who may have tax exposures in their country of tax residence.
Another area that may have also not been so visible previously is capital transactions with beneficiaries. These may also become more visible to the Ministry of Social Development. A little known requirement for recipients of income tested benefits is that additional income for testing purposes includes non-taxable distributions as well as taxable distributions. Again this information has not previously been available but given there is an agreement for information sharing between MSD and IRD, this will likely become more visible in the future.
Where Inland Revenue reviews the 2022 return filed and finds something of concern, they have the right to request the same information for the previous eight years. We recommend trustees consider the reporting required for the 2022 year as early as possible to consider what information needs to be collected and what the result will look like when viewed through the lenses we have mentioned here. And for those who have not been keeping good financial records, now is the time to get them up to date.
If you want to discuss your trust disclosure obligations, contact your usual Deloitte advisor.
March 2021 Tax Alert contents
- What are the tax obligations which come with claiming COVID-19 Government support?
- The tax cost of your fringe benefits is about to increase
- The new 39% tax rate puts tax structuring back into the spotlight – why it may be time to talk about tax avoidance
- Are you ready for the new Trust Disclosure Rules?