As we start to think about completing income tax returns for the financial year just ended, anyone that is a trustee of a trust will need to consider how the new tax disclosure rules will impact them.
These new rules apply to the 2022 tax year onwards because of the “integrity risk” that arises where current income retained in a trust is taxed at 33 percent with no further income tax imposed if this income is subsequently distributed to a beneficiary who might be on the highest marginal rate of 39 percent.
Inland Revenue’s fear is that more income than in the past will be flowed through either new or existing trusts, thus eroding the tax revenue base.
Under these new disclosure rules, trustees will have to disclose in the trust tax return details of settlements on the trust and capital distributions which are not taxable, as well as continuing to disclose taxable distributions of current year income.
This even extends to notional or non-cash distributions, such as rent free use of trust assets such as the family home or bach.
Minor and incidental non-cash distributions are excluded from the need to disclose, but as yet we have received no guidance on what will be considered minor and incidental!
The government will use the information collected to decide on whether the trustee tax rate should also be increased to 39 percent.
The cynics among us suspect this decision may have already been made and that collecting this information is to justify this tax policy change heading into the next election.
On top of these disclosure requirements, for most trusts there is also now a legislative requirement to prepare financial statements for tax purposes to a minimum standard.
While this sounds simple in theory, there is no doubt these measures will increase compliance costs for most trusts.
Is your trust excluded from the new rules?
There are some limited exceptions to these new rules. Trustees should first check if they qualify to be excluded from these rules.
The largest category that will be exempt are non-active trusts that have filed an IR 633 declaration, and this will hopefully work to exclude trusts holding the family home, where they have no income and minimal administrative expenditure.
Of the approximately 400,000 trusts in New Zealand that Inland Revenue has records of, 55 percent currently do not report any taxable income and so may qualify for non-active status.
All trustees should immediately review whether their trust is non-active and, if so, file the IR 633 declaration if this has not already been done.
The other types of trusts that are carved out from these rules include foreign trusts, charitable trusts and trusts that choose to be a Maori Authority.
Minimum standards now required for financial statements
Trusts that have to date been preparing bare bones (or no) financial statements need to be aware of the new rules setting out minimum standards for trust financial statements for the 2022 year onwards.
These are required so the Government can collect consistent and better-quality information across all trusts for its monitoring purposes.
Inland Revenue has noted a divergence in approach by trusts to reporting income and assets where an IR10 (the summary of financial statements) is filed.
There are two tiers of requirements for the financial statements.
Core requirements, including the need to prepare double entry accounts and disclose the asset valuation methods, apply to all trusts, and more complicated rules apply to trusts that are not “simplified reporting trusts”.
Simplified reporting trusts are those with assessable income of less than $100,000, deductible expenditure of less than $100,000 and total assets at the accounting period of less than $5 million.
The trust income tax returns will include new disclosure boxes this year, and where required the financial statements (or IR10) will need to be provided alongside the return.
The bottom line is, accountants will be asking for a lot more information from their trustee clients this year, and if you prepare your trust tax returns yourself you will need to make sure you upskill on these new rules.