New Trust Disclosures – what you need to know

In December 2020, while we were all wondering what our first summer with COVID would be like, the Government proposed new trust disclosure rules and promptly passed the rules into law 5 days later. You are therefore forgiven if you are a little surprised by these new rules, as there was very little fanfare or consultation associated with them. 

The rationale behind the new rules is to enable the Government to determine the extent to which there may be an increased use of trusts following last year’s introduction of the 39% personal tax rate for income in excess of $180,000. The Government is also coming under increased pressure from offshore jurisdictions to share information on New Zealand trusts. 

The new trust disclosures will require trustees to commit more time than they have previously spent on the administration of the trust, which will undoubtedly cause an increase in compliance costs for the preparation of the trust’s annual accounts and tax returns, starting with the 2022 income year. Inland Revenue will have retrospective powers to request the new disclosure information back to 2015 if they have any concerns. 

The rules apply to all trusts who are required to file tax returns, although there are several exemptions, including non-active trusts, charitable trusts, Māori authority trusts, and foreign trusts. 

If your trust does not derive any income, and if not already done so, the trustees should look to complete a non-active declaration to remove the requirement for the trust to file an income tax return. This could be the case for most family trusts that hold the family home. Speak with your Nexia advisor if you’re unsure. 

While trusts do already disclose information to Inland Revenue through the tax return process, such as beneficiary distributions, and income and expenses, and the Trust Deed is ordinarily provided to Inland Revenue when applying for the trust’s IRD number, which records settlor, trustee and beneficiary names, the additional information that must now be provided is more detailed. 

The additional information falls into four categories: 

1. Financial information
   Regardless of how large or small the trust is, all trusts (that are not exempt) must prepare annual accounts and file an income tax return with the additional disclosures, although there is a de minimis threshold that allows very small trusts to use cash-basis accounting rather than accrual accounting and removes the requirement to provide prior-year comparatives in the annual accounts. The financial information must now include any untaxed realised gains, ownership interests in investments, movements in beneficiary accounts, and the valuation methodology for various assets.  
2. Settlors and settlements
   Details of settlements made during the year must be disclosed, even if the settlements have been valued at zero, together with the settlor’s name, date of birth, IRD number or overseas tax identification number. For the 2022 year, names and details of prior year settlements also need to be disclosed.  
3. Beneficiaries and distributions
   Details of distributions to beneficiaries, including capital distributions, use of trust property for less than market value, and movement in beneficiary current accounts need to be disclosed, together with beneficiary’s name, date of birth, IRD number or overseas tax identification number. 
4. Power of appointment
   Where a person has power under the trust deed to amend the trust deed, or to appoint or remove trustees or beneficiaries, their name, date of birth, IRD number or overseas tax identification number details must also be disclosed. 

So what will all this mean for you?  

• Given the significant increase in information, the Inland Revenue will now require, the costs for trustees to maintain the trust and comply with these new requirements will increase 
• Trustees will need to spend additional time collating the disclosure information when they are preparing year-end information for the annual accounts and tax return 
• Annual compliance costs will increase as accountants will need to enter the additional disclosure information into the Inland Revenue’s system 
• The Government will likely share the disclosure information to overseas tax authorities as well as other New Zealand Government departments, such as the Ministry of Social Development which may impact on student loans and other benefits. 

If you haven’t yet given any thought to the impact this will have for you as a trustee, please do so now, as we are about to roll into the new tax year and will start requesting records for your annual compliance work. 

Please get in touch with your Nexia advisor if you would like to discuss.