Tax returns – does your Trust have to file one?

There are some circumstances outlined below where a trust is exempt from filing a tax return. First, to be clear, if your trust has a taxable activity and earned income, or incurred deductible expenses, the trustees need to ensure an income tax return is filed with Inland Revenue each year.

However, a non-active trust is exempt from filing an income tax return, which includes complying with the onerous trust disclosure rules the government introduced in 2022. There have been recent changes to the non-active criteria for NZ complying trusts you need to be aware of.

Prior to the 2022 income year, trusts have only been considered non-active if they received less than $200 of interest income and had no deductions – quite a small threshold. This did not allow for even small amounts of other income such as dividends.  Many very small trusts did not qualify as non-active under this limit, and some would argue, incurred a disproportionate compliance burden for their size.

New non-active trust criteria

New criteria for non-active trusts was introduced towards the end of the 2022 filing period when some trusts had already filed their income tax returns. Whilst a non-active trust is considered to have not derived any income and have no deductions, the new non-active criteria enables your trust or estate to be non-active if it has;

• Reportable income of $1,000 or less. Reportable income includes PIE income, NZ resident interest and dividends, non-resident interest, dividends and royalties, taxable Māori authority distributions.
• Is not party to transactions that give income to associated persons or entities. Therefore, income distributions to beneficiaries would exclude a trust from being non-active.
• Reasonable fees for administering the trust. For example, professional trustee fees.
• Bank charges or minimal administrative costs less than $1,500 per year. This may include accounting or legal costs.
• Costs related to a family home owned by the trust and incurred by the beneficiaries. For example insurance, rates, mortgage interest. These are not tax deductible costs.
• Ceased GST registration, if applicable

The criteria for testamentary trusts (trusts created by terms of a will) is more generous:

• Reportable income of $5,000 or less
• Non-reportable income up to $1,000 with deductions that would reduce the net income to before $200

What to do if your trust qualifies to be non-active

If your trust now qualifies to be non-active, we can assist you with filing a non-active declaration with Inland Revenue. Non-active trusts can still carry forward any tax losses to be offset against any future taxable income. Non-active status remains in place until a trust stops meeting the criteria or becomes active, at which point trustees need to advise Inland Revenue and start filing income tax returns.

Note that regardless of any requirements to file income tax returns, a trustee still has a fiduciary duty to manage trust assets and maintain proper accounts of trust funds. It is therefore often still recommended to prepare financial statements for a trust that may be non-active for income tax purposes.

Please contact your local Nexia advisor for further assistance.

If you have landed on this page because you are looking for NZ or International tax advice, Nexia New Zealand has Tax Consulting services in both Auckland and Christchurch to provide the expertise you need. Contact us today.