As some readers may be aware, in December 2020 the government enacted new disclosure requirements for domestic trusts, effective from the 2022 tax year onwards.
The purpose of this is so the government can gain insight into the effectiveness of the new highest individual tax rate, being 39% for individuals who earn $180,000 or more. As well as this, it will enable the government to better understand and monitor the use of structures and entities by trustees.
Currently, income retained in a trust is taxed at 33%, with no further income tax imposed if this income is subsequently distributed to a beneficiary who might be on the new highest marginal tax rate of 39%.
Under these new disclosure rules, Inland Revenue will have complete visibility over how trusts are being used to fund annual capital distributions from income taxed at the lower trust tax rate. The government will be using this information collected to decide on whether the trustee tax rate should also be increased to 39%.
What are the implications of these new requirements?
For most trusts, there is now a legislative requirement to prepare financial statements for tax purposes to a minimum standard. It is also necessary to disclose a lot of detailed information about settlements, settlors, and distributions to Inland Revenue as part of filing the annual trust tax return.
It sounds simple in theory, but there is no doubt these measures will increase compliance costs for most trusts. We note in the regulatory impact statement, officials admit they “have limited understanding of the compliance costs that trusts will face with the increased disclosure requirements and how large the costs will be”.
After a period of public consultation there has been some improvements to the minimum financial statement proposals, but in our view this does not significantly reduce the amount of information that all trusts need to disclose when filing their tax returns. Currently, we are still waiting for Inland Revenue to release its final operational guidance on how to apply the rules.
Is your trust excluded from the new rules?
First, it is important to note that not all trusts are caught by these rules. Trustees should first check if they qualify to be excluded from these rules as this will save considerably angst. The largest category that will be exempt are non-active trusts.
Typically trusts holding the family home, with no income and expenditure will be considered non-active. All trustees in this situation should review whether their trust is non-active and speak to their accounting advisor about filing an IR633 (non-active) declaration if not already done.
The other trusts that are excluded from these rules include foreign trusts, charitable trusts, trusts that choose to be a Maori Authority, trusts that are widely held superannuation funds and lines trusts.
Filing the trust tax return and making disclosures.
The next task for trustees is to file various disclosures of all settlements, settlors, distributions, and those with the power of appointment via the IR6 and IR6B forms, which we understand have been redesigned to collect all the new information now required.
Unfortunately, at the time of writing this article, the final guidance on the specific information required has not been released. However, what we do know is that accountants will be asking for a lot more information from their trustee clients this year! (LOGAN GRANGER)
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.
JOHNSTON ASSOCIATES, 14 St Marys Bay Road, T: 09 361 6701, www.jacal.co.nz
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