Enhanced reporting requirements for trustees

The IRD recently released new rules regarding the annual reporting requirements for domestic trusts.

The new IRD rules significantly increase the disclosure requirements for New Zealand taxable trusts. The purpose of the rules is to enable the IRD to better understand and monitor the use of trusts and their financial positions to ensure that trusts are not used as a way to defeat the new 39 per cent top rate of personal income tax that was introduced in 2020.

However, for trustees these rules create further obligations, adding to the responsibilities that come with the role. The new rules apply from the 2022 tax year onwards and more information must be provided to the IRD about a trust’s earnings, financial position, settlements, settlors, distributions, beneficiaries and power of appointment.

What are the new obligations?

The IRD requires financial statements, with a statement of profit or loss, as well as a statement of financial position to be provided when the trust’s tax return is filed.

Trustees are also required to report information on beneficiaries that receive distributions from the trust, including the amount and nature of the distribution, the name of the beneficiary, the date of birth of the beneficiary and the beneficiary’s IRD number or overseas tax identification number.

For each settlement made in any income year, the trustee will be required to disclose the amount of the settlement and the nature of the settlement, together with details, including name, date of birth and tax identification number, of those who have made the settlements. Additionally, trustees need to provide details of anyone who holds the power to change trustees or beneficiaries or amend the trust, including their name, date of birth and tax details.

Importantly, these rules only apply to income earning trusts and so the trustees of any non-income earning trusts should take advice on whether they can file a non-active declaration with the IRD to ensure they are not caught by these rules.

Simplified reporting requirements are also available to those trusts that earn assessable income of less than $100,000 in an income year, deductible income of less than $100,000 in an income year and have total assets of less than $5 million.

What does this mean for my trust and/or trustees?

These new obligations emphasise the active role a trustee has and the responsibilities that arise from that role. Additionally, the costs for trustees to maintain the trust and comply with these rules are likely to increase.

These rules continue to highlight the international scrutiny on ensuring trusts are not used as a tax avoidance structure. Trustees should review their trusts to ensure that a trust structure remains appropriate to meet the needs of beneficiaries and the settlor’s objectives in setting the trust up. Where tax was a primary driver for establishing the trust, a review should be undertaken as to whether another wealth planning structure is more appropriate.

Regular reviews of trusts should be undertaken by trustees to ensure that they are fulfilling not only these requirements but also their obligations introduced by the Trusts Act 2019, as well as their general legal and fiduciary duties. The best way for a trustee to ensure that they are meeting their obligations is to have a team of specialist legal, accounting and investment advisors on hand to assist them in all aspects of being a trustee.

If you are interested in having your trust reviewed to ensure it is still fit for purpose, contact Morris.