New top tax rate brings unexpected reporting requirements for trusts

Thursday 17 December, 2020

Many of New Zealand’s estimated 300,000 to 500,000 trusts are facing increased reporting requirements as a result of the recent increase in the top tax rate. In early December 2020, the Government passed legislation increasing the top personal tax rate to 39% from 1 April 2021. The new rate applies to all income earned over $180,000.

The tax rate for trusts (trustee income) has not changed from 33%, leading to concerns from the Government that wealthy individuals may use their trusts to avoid incurring tax at the new top tax rate. In order to prevent this, the new Act introduces new disclosure requirements for trusts to allow greater IRD monitoring of trusts.

Disclosure requirements

From 1 April 2020, trustees of trusts must file income tax returns for all income earned as a trustee of the trust together with:

• A statement of financial performance and a statement of financial position.
• The amount and nature of each settlement made on the trust in the income year and the name and details of each settlor (date of birth, country of tax residence and IRD number (or equivalent)).
• Details of each distribution made by the trust and information about the beneficiary receiving it, including name, date of birth, IRD number (or equivalent) and country in which they are a tax resident.
• Name and details of every person with the power to appoint or remove trustees or to add or remove beneficiaries.

Application

The new disclosure requirements apply to all trustees of trusts except for:

• Foreign trusts
• Trustees incorporated as a board under the Charitable Trusts Act
• Trustees eligible to choose to become a Māori authority
• Non-active trusts

What is a non-active trust?

A non-active trust is a trust where:

• The trustee has made a declaration to the Commissioner of Inland Revenue that the trust is a non-active trust; AND
• The trustee has not:
• Derived any income during the tax year; AND
• Has no deductions; AND
• Has not had any involvement with trust assets leading to the generation of income for any person or fringe benefits for any employee.

I’m a trustee. What does this mean for me?

If your trust earns or generates any income during the tax year commencing 1 April 2021, you will now need to comply with the new disclosure requirements for trusts. This makes it particularly important for trustees to keep good records of all settlements and distributions.

These new reporting requirements are unexpected and may cause concern for trustees. If you would like further information about how this affects your trust, our trust experts can help.