Trustees have been tasked with satisfying significant statutory duties and heightened compliance obligations with the passing of the Trusts Act 2019 which became operational 30 January 2021. Those obligations have been further entrenched with the new additional tax information disclosure requirements (Disclosure Rules) imposed by the Commissioner of the Inland Revenue Department, pursuant to amendments made in December 2020 to the Tax Administration Act 1994.
The purpose of the new Disclosure Rules is to enable Inland Revenue Department to collect information to permit scrutinization of transactions occurring within a Trust and between a Trust and individuals. All transactions are caught by these rules, irrespective of whether the transaction is taxable or not.
How This Affect Trusts
Historically, Trusts subject to the New Zealand tax regime have been required to file income tax returns declaring taxable distributions made to Beneficiaries but haven’t been required to file full Financial Statements or provide details of transactions which were not subject to tax. These new Disclosure Rules however change that.
Now, from the 2022 income year, which commences 1 April 2021, Trustees of existing and new Trusts, which produce assessable income, will need to provide the Inland Revenue Department with additional information relating to the Trust they govern. Trustees should note the Commissioner has the power to request information from Trustees for earlier periods of time – as far back as 2013.
Non-active Trusts, Charities, Maori Authorities and Foreign Trusts that are already subject to the foreign trust disclosure regime will not be subject to these new Disclosure Rules.
What This Means For You
As noted above, prior to the enactment of the Disclosure Rules, many Trusts have filed only an income tax return. From the 2021-2022 year however, Financial Statements will be required to be prepared and filed for Trusts that are subject to the disclosure regime. Accordingly, many Trusts in New Zealand which have not filed full Financial Statements in previous years, will be required to do so for the 2022 year and the foreseeable future.
Furthermore, as part of the annual tax return filing process, Inland Revenue Department will want to sight additional information. Note for brevity sake, we have recounted the categories of information the Commissioner will be entitled to see below. This is an indicative inventory of information required under the Disclosure Rules and should not be taken as a complete register of all information able to be reviewed by the Commissioner:
- Statement of Profit and Loss and Statement of Financial Position;
- Details of the amount and nature of each settlement made during the year;
- Details of each settlor who has made a settlement on the Trust or whose details haven’t been provided previously to the Inland Revenue Department being their name, date of birth, tax residence jurisdiction and IRD number;
- Details of each and every person who has the power to add or remove Trustees and Beneficiaries under the Trust including their name, date of birth, tax residence jurisdiction and IRD number;
- Details relating to source and amount of capital and / or income distributions monetary and non-monetary) made to Beneficiaries including the recipient’s name, date of birth, tax residence jurisdiction and IRD number; and
- Any other information requested by the Commissioner such as details in relation to a transfer made to the trust by an associated person.
What You should Do Now
Whilst Trustees and Settlors should be cognisant of these Disclosure Rules, they should not be unduly disturbed by them. Greenlion Accountants and its Trustee Services Division are well equipped to assist Trust clients. In this respect, Greenlion have been writing to clients advising of Trust documentation required when financial statement have been prepared for Trust clients.
What is clear is Settlors and Trustees must take steps to ensure all settlements made on Trusts, transactions the trust enters into, capital and income distributions made to Beneficiaries and beneficiary current account balances withstand potential Inland Revenue Department scrutiny. Accordingly, documentation such as Trustee Resolutions and Deeds of Acknowledgment of Debt noting terms and balances owed need to be in place.
Irrespective of whether you agree with the Commissioner having the power to review Trusts to this degree or whether you see the Disclosure Rules merely permitting a fishing expedition, the fact of the matter is they provide Inland Revenue Department with the power to request information and Settlors and Trustees should be mindful of them and take steps to ensure compliance. Accordingly, all Trust clients should discuss with their Greenlion Advisor and / or Trustee Services division what documentation should be put in place to ensure they can meet information requests made by the Commissioner pursuant to the new Disclosure Rules.