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New Trust Disclosure Rules

March 18th, 2021

This article was written by Peter Speakman of Speakman Law and is reproduced here with his permission.

Applicable to all NZ trusts with immediate effect are new disclosure rules.

Their scope and the means by which they have been introduced is quite extraordinary. They have been introduced without any public consultation and with retrospective effect – going back to the 2013 – 14 income year. I have never witnessed a piece of legislation introduced with such alarmingly long retroactive effect.

What are they, why do we have them and how might they affect you?

What are they is twofold.

First, they impose a requirement for trusts to file an annual return (along with the usual return of income that trusts already provide to Inland Revenue) that contains:

1. A statement of profit or loss and a statement of financial position;

2. The amount, and nature of each settlement made on the trust in the year (other than minor service provided at an undervalue);

3. The name, details, jurisdiction and tax identification number of each settlor who makes a settlement on the trust each year;

4. Distributions made by the trust in the year including:

- the amount of the distribution; and

- details of the beneficiary of the distribution.

5. Details of each person who holds the power of appointment for trustees or beneficiaries or who has power to amend the trust deed;

6. Any other information required by Inland Revenue.What are they, why do we have them and how might they affect you?

What are they is twofold.

Inclusion of "other information required by Inland Revenue" essentially gives Inland Revenue unfettered rights to seek any information it wants about the trust.

The second part of the disclosure rules is the right for Inland Revenue to seek the same information listed above for all years from the 2013 – 14 income year, to the extent it is in the knowledge, possession or control of the trustee.

Limits on these rules are that they do not apply to non-active trusts, foreign trusts, charitable trusts (that are incorporated) and Maori trusts.

Why have these disclosure rules been introduced? They are intended to buttress the forthcoming 39% personal tax rate, recognising the 6% differential between that rate and the trust tax rate and the motivation for the tax planning that this lack of alignment in rates prompts. They buttress the 39% tax rate by giving Inland Revenue the opportunity to compare the pattern of distributions going forward with the pattern of distributions by the trust historically. Where there is a change in that pattern, either reflecting increased frequency or the addition of new beneficiaries and their new found participation in distributions, Inland Revenue will be on alert for tax motivated structuring and behaviours.

Who might be affected?

Nearly all trusts are affected, including family trusts, standard private trusts that own shares in a company, solicitors trust accounts and trusteeships that arise from a deceased’s estate.

The rules are plainly targeted at those with intent to utilise trusts to substitute a 33% tax rate where a 39% tax rate would otherwise apply. Only a small number of trusts likely fit this category yet inevitably, the new disclosure requirements will impose additional costs for thousands upon thousands of trusts founded on estate planning, and not tax planning.

For those searching for the new rules they are contained in sections 59BA and 59BAB of the Tax Administration Act, inserted by the Taxation (Income Tax and other Amendments) Act 2020.

Chris Lynch, CA

Managing Director

Email Chris

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