New Tax Disclosure Obligations For Trustees

The new legislation implements the already anticipated new personal top tax rate of 39% for income over $180,000.00. This takes effect from 1 April 2021.

The Company and Trust tax rates are currently unchanged at 28% and 33% respectively. However, for Trusts, the Bill introduces significant new disclosure obligations that take effect from the 2021/22 financial year.

Trustees will now be obliged to provide the following information when filing an income tax return for the Trust:

• A profit and loss statement and statement of financial position;

• The amount and nature of any settlements made to the Trust in the income year and the names, birth dates, tax residence information and filing numbers for every settlor who has made a settlement;

• The amount of every distribution made by the Trust, and the names, birth dates, tax residence information and filing numbers for every beneficiary who receives a distribution;

• The names, birth dates, tax residence information and filing numbers for every person having a power to add or remove trustees or beneficiaries under the trust; and

• Other information required by the Commissioner.

The Commissioner also has the ability to request this information for past years back to 2013. Because these additional filing requirements will form part of a trustee’s annual return requirements, existing penalty provisions will apply if the information is not provided or false information is provided.

The new obligations will not apply to:

• Non-active trusts that are not required to file tax returns;

• Charitable trusts;

• Maori Authorities; and

• Foreign trusts.

The Government’s intention is to monitor the extent to which Trusts are used to shelter assets and income from the new top tax rate. David Parker, Revenue Minister has said, “This bill includes powers to collect information from trustees to test compliance and the effective operation of the 39% tax rate and to further understand what trustees do with trust assets and income.”

The compliance costs for some Trusts will be substantial. Previously there has not been a requirement for Trusts to prepare financial accounts.  This is no longer the case and all Trusts will be required to comply unless they fall within one of the exceptions (such as a non-active trust that just holds the family home).

Beneficiary Current Accounts

In the past it has been common practice for some Trusts when distributing income to beneficiaries, to hold the balance as a credit against the beneficiary’s current account, rather than pay out the cash.  Some beneficiaries will have developed sizeable credits as a result and due to the lack of financial disclosure of Trust financial information, will be unaware of the distributions that have been made to them.

Given the information disclosure requirements under the new Trusts Act 2019, these positive balances existing in beneficiary current accounts have caused some Trustees concern. They are an asset of the beneficiary and, with the increased financial information that beneficiaries may have about the Trust, there may be requests for these balances to be re-paid.

Currently, a beneficiary that has a current account balance of more than $25,000.00 on which there is no interest paid is deemed a settlor of the Trust. From 31 January 2021, this will be the case regardless of the level of knowledge the beneficiary has of that account. This may result in some unintended tax consequences for beneficiaries.

If you haven’t already, it is time to review your Trust’s beneficiary current accounts and consider if these should be repaid and the consequences if they are not.

Author: Tanya Speight

Disclaimer

Saunders Robinson Brown does not provide tax advice. The above is provided for your general information only. We recommend that you seek specialist tax and accounting advice if you have further question.