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Trust Law Shake-Up
The Labour Government has introduced a new top tax rate of 39% for income earned over $180,000 for the 2022 financial year. This has coincided with a major shake-up by IRD to ensure trusts can’t be used for tax avoidance purposes. Trusts currently have a top tax rate of 33%. This follows the Trusts Act 2019 which came into effect 30/01/2021 requiring trusts have greater transparency; improved record-keeping and give beneficiaries greater rights.
Financial Reporting
Among the law changes is an increase in the financial reporting required by the IRD. Any trust that is required to file a tax return will now also have to make available a Profit and Loss Statement, Balance Sheet and Accounting Policies. With very few exceptions, all trusts with income or deductions are included in these changes.
The exact details of these changes are still being finalised by the IRD. A draft operation statement released for consultation closed submissions in November 2021. It is expected there will be several changes to this paper, but it is all we have available to work off currently.
Some key points to note
- Obligations for trustees have significantly increased alongside the increase in power of beneficiaries to hold them to account for their actions.
- The IRD — and therefore your accountant — may be asking more questions and expecting better record keeping.
- Any transactions with associated parties such as loans interest, wages or rent must be recorded.
- Business Trusts’ tax returns will now have to be modified to include non-business items.
- Any trust that has income assessable for tax purposes will have to provide details of any cash or non-cash distributions made to beneficiaries, as well as specific tax and personal details of those beneficiaries. For example, where the trust owns a bach that is being provided for free for the beneficiaries' use, a disclosure will need to be made regarding the value of that use and any deemed distribution being created by that use.
- An additional form will be required to be submitted with the tax return providing a repeat of all of the tax return information, plus any disclosures regarding distributions to beneficiaries, settlements to the trust, and the names, dates of birth, jurisdictions and IRD number of all settlors, beneficiaries and persons with power of appointment. This form has yet to be finalised by Inland Revenue.
- If a beneficiary is owed more than $25K without being paid interest, their details must be provided, and they become classed as a settlor of the trust. Theoretically, these changes could affect the beneficiary's student allowance or Working for Families payments.
It would appear that the Government does not like Trusts and thinks people are avoiding paying the top marginal tax rate. If you haven’t already, now is a very good time to speak to us to see if and how these changes affect you. We should have the final details prior to starting the 2022 tax returns from 1 April 2022.