The 2020/2021 year will always be remembered for the worldwide Covid-19 Pandemic which affected people from all walks of life. Whilst the virus was slowly spreading two significant tax changes happened in New Zealand, specifically:
- The Government proposed new trust disclosure rules and passed it into law five days later with little to no consultation, almost as if by stealth
- The Government also passed legislation under urgency to increase the top individual income tax rate from 33% to 39% for personal income in excess of $180,000
Both changes are applicable from 1 April 2021.
The Government’s motivation behind the new disclosure rules has a direct correlation to the use of a trust as a tax planning tool. The new rules will enable Inland Revenue to establish to what extent trusts are used to effectively avoid the 39% tax bracket.
The new rules will additionally enable the Inland Revenue to share the disclosed information with overseas tax authorities and other New Zealand Government Departments such as the Ministry of Social Development.
What do the New Disclosure Rules entail?
In short, from the 2021 – 2022 income year all New Zealand Trusts have to:
- Disclose a laundry list of additional information
- Prepare financial statements
- File a tax return
Complying Trusts that are non-active with interests only income of less than $200 per annum are exempt from the above three requirements.
Per Inland Revenue legislation the additional information is provided with the IR6 Trust Tax Return in the form of:
- IR6S – Relates to Settlor & Settlements (Current Year Settlements)
- IR6B – Relates to Beneficiaries details
- IR6P – Relates to the details of any person that has the power to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed
The additional information required to furnish the above forms include but is not limited to:
- The amount of settlements made to the trust in the income year which includes cash, financial arrangements, land, buildings, shares/ownership interest and settlements that have been valued at zero.
- The full name, date of birth, jurisdiction of tax residency and IRD number or Tax Identification Number (if tax resident in another country) of all settlors.
- The full name, date of birth, jurisdiction of tax residency and IRD number or Tax Identification Number (if tax resident in another country) of all beneficiaries as well as any movements in beneficiary current accounts which include:
- The Opening balance
- Distributions (accounting income, trust settlement, capital, use of trust property for less than market value, distribution of trust assets and forgiveness of debt)
- Amounts withdrawn or enjoyed from the trust
- The Closing balance of the amount owed to the beneficiary or owed to the trust
Over and above the non-active trusts that are exempt of the new rules, the following trusts are also exempt:
- Estates still under administration
- Foreign Trusts
- Charitable Trusts
- Trusts that are eligible to be Maori Authorities
- Widely-held superannuation funds
- Exempt employee share scheme
- Debt funding special purpose
- Lines Trusts
How does it affect you?
Trustees have to spend more time than ever before on the administration of a trusts, it is also likely that there will be a large increase in the compliance cost for trusts because a lot of the information required by the new rules is not always readily available.
We are finding that the 2022 year is particularly challenging as all of the required information not only has to be sourced, it also needs to be entered into the prescribed Inland Revenue provided IR6 returns.
Income tested benefits you receive may be affected in that Inland Revenue will now have access to not only taxable income distributions but also non-taxable distributions which are both taken into account for testing purposes. An example being working for families.
Inland Revenue has the power to request the same information from the trust for the previous eight years should they find anything of concern during their review of the 2022 income tax returns as filed.
In summary we believe the impact of the new disclosure rules are significant on trustees and we urge you to contact us if you would like to discuss your trust disclosure obligations.