Home > Updates > Increased disclosure requirements for trusts
Legislation passed late last year will see the top personal tax rate increase to 39% on income earned over $180,000 from 1 April 2021. This rate applies to individuals only; the trust and company rates remain at 33% and 28% respectively.
There are consequential changes to the PAYE rules, FBT rules, RWT on interest, ESCT, residential land withholding tax rates, RSCT and taxable Maori authority distribution rates. Most changes apply from 1 April 2021, with the exception of interest which will apply from 1 October 2021.
The rules also provide for increased disclosure of information to Inland Revenue. This means that from the 2022 income year onwards, you will need to provide more information about your trust as part of your annual tax return filing process than in prior years.
The objective of this increased information collection is clear; Inland Revenue is carefully monitoring any structuring or similar activity that is aimed at avoiding the top 39% marginal tax rate. The bill commentary accompanying the changes introduced states that:
The purpose of these measures is to “collect information from trustees to assess compliance with the 39% rate and to understand and monitor the use of structures and entities by trustees”. The IRD wants more information on the income earned by trusts and also the financial position of trusts.
The Inland Revenue has also released a number of operational statements around personal services income attribution, tax avoidance and use of structures to divert income. Inland Revenue appear to be preparing for an increase in audit activity in this area. What does this mean for you?
From the 2022 income year, trustees will need to provide the following information to the IRD as part of the annual filing process:
The details required above will form part of the trust’s annual return requirements and existing penalty provisions will apply if information is not provided or is false.
The new obligations won’t apply to inactive trusts, charities, Maori authorities and foreign trusts already subject to the foreign trust disclosure rules.
You can expect to be asked to provide additional information when preparing your trust tax return for the 2022 income year onwards. We will also be considering Inland Revenue’s focus areas when preparing your trust tax returns in future and we may discuss any areas of concern with you.
The additional disclosures are required for the 2022 income year and going forward, however the Commissioner is entitled to request information back to 2013 where issues are identified.
A further recent change is in relation to beneficiary current accounts that are left in credit but not paid out.
Having credit beneficiary current accounts has been common practice in the past, with some beneficiaries building up significant balances of undrawn funds. However, there are two recent changes which are likely to impact on this practice going forwards.
Firstly, trustees have increased information disclosure requirements under the Trusts Act 2019. The extent of those requirements are outside the scope of this article, but trusts that have credit beneficiary accounts are likely to be required to disclose this fact to the beneficiary. There may be circumstances where this is difficult to manage, particularly if the current account balances are part of a wider family/asset planning scheme and the beneficiaries want to be paid out.
Secondly, the Inland Revenue has introduced rules which provide that a beneficiary that has a current account balance of more than $25,000.00 on which there is no interest (or below market value interest) is paid, is deemed a settlor of the trust. This may negatively impact on the trust as the deemed settlor will be associated to the trust for tax purposes and may cause the trust unintended consequences, for example under the land taxing or foreign trust rules.
The tax landscape is changing; ensure you get the best advice to help you successfully navigate those changes. If you haven’t already, now is the time to review your trust arrangements and beneficiary current accounts. Please contact our tax team if you would like assistance.
