Trusts / Asset Planning
Just when you thought you had complied with your mandatory trustee duties under the Trusts Act 2019 – there is more!
Tax reporting obligations
New tax reporting obligations have been introduced for trusts that earn income, with effect from 1 April 2021. The new requirements are included in the Taxation (Income Tax Rate and Other Amendments) Act 2020, which amends the Tax Administration Act 1994. There is also a power for retrospective information gathering, so trustees may need to provide similar information going back as far as the 2014 tax year.
While these obligations only apply to trusts that earn income, a range of different documentation must be provided, which will require timely, complete, and accurate record-keeping. The information that must be provided to the IRD includes:
- Information on distributions from and settlements on the trust during the year.
- Financial accounting information – this could include transfers to the trust by associated persons, and other information specified by the Commissioner.
- Information about loans to and from related persons.
- Profit and loss statements and annual returns.
The provision of information about the trust also extends to personal information. This could include details such as beneficiaries’ names, birthdates, tax resident information, IRD numbers, and details of each transaction. The details of appointors or those who hold positions of power within the trust may also need to be disclosed.
Whether and to what extent this information will be shared with other agencies or foreign governments is yet to be tested. Such disclosure will likely be determined by any relevant tax exchange agreements between the New Zealand government and other jurisdictions.
There are important qualifications to the disclosure regime set out above. Trustees of foreign trusts do not have to comply because they have a separate obligation to provide an annual return. Incorporated boards of charitable trusts are also exempt. If the trustee is eligible to become a Māori authority, then they do not need to comply.
If a trustee is a non-resident of New Zealand, then a settlor of the trust who is a New Zealand resident is responsible for ensuring the performance of the disclosure obligations.
These types of reporting obligations will likely increase compliance costs for trusts. Trustees will need to be mindful of income-earning assets and non-income earning assets being included in the same trust structure. Trustees will also need to weigh up the protections afforded by the trust structure versus the increased compliance costs that may result.