The 39% tax rate for individuals is going to mean close scrutiny will 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.
Previously, trusts have files returns declaring taxable income including distributions to beneficiaries that are subject to NZ tax. 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 April 2021 in most cases) with trusts being required to prepare IRD minimum standard financial statements and to make significant other disclosures, including the following:
- Details of all settlements on the trust which includes all transfers of value along with full details identifying those entries 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 is going to mean a large increase in compliance for trusts. A lot of info required is not always on hand or easy to obtain. 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 the 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 the individuals (noting though that this will likely apply to the first dollar of income).
The new disclosure rules mean this information will then be available for sharing under International Exchange of Information Agreements with foreign tax authorities. All trustees and beneficiaries should expect information to be freely available to the foreign tax authority as the identifying details of beneficiaries will include their tax residence an tax file numbers. This may include interest free loans or capital transactions with foreign beneficiaries which possibly should have been taxed in their country of residence. 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. Recipients of income tested benefits are required to include non taxable distributions as well as taxable distributions as income for testing purposes. 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.
If Inland Revenue reviews the 2022 return fled 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, please contact us.