Inland Revenue Review: Trust disclosure regime is here to stay, but improvements may be made
If you have a trust and are required to file tax returns, then you will be all too familiar with the increased compliance obligations and costs that have resulted from the trust disclosure rules that were introduced, under urgency and without public consultation, in December 2020.
The rules came into effect for the 2021/22 income year to help Inland Revenue assess trustee compliance with the new 39% personal tax rate and to inform Inland Revenue about the types of structures and entities used by trustees. Under the New Zealand domestic trust disclosure rules, all trustees of taxable trusts (with estates and non-active trusts exempted) are required to prepare financial statements and disclose details of settlements, settlors, distributions, and beneficiaries, as well as persons with powers to appoint or remove a trustee or beneficiary or amend the trust deed. Collecting the required information, particularly in the first couple of years of reporting, can be difficult and time-consuming.
Inland Revenue has completed a post-implementation review of the trust disclosure rules with the objective to determine whether changes should be made to improve future disclosures and reduce compliance costs. Stakeholder groups such as trustees, tax agents, tax advisors and accountants were interviewed, and Inland Revenue sent a survey to 17,000 trustees (however only 1,173 valid survey responses were received).
After carrying out its review, the recommendations of Inland Revenue are:
The disclosure regime should be maintained, as the rules are important to:
- support the Commissioner of Inland Revenue’s ability to assess compliance with tax rules and develop tax policy; and
- assist the Commissioner in understanding and monitoring the use of structures and entities by trustees.
Small tweaks could be made to improve future disclosures and reduce compliance costs, such as:
- Simplifying compliance by reducing the number of subjective tests in the rules;
- Simplifying compliance by reducing the granularity of the rules, through removing unnecessary breakdowns of disclosures (e.g. trustees should not have to distinguish between whether a non-cash distribution was a distribution of trust assets, the use of trust property for less than market value or the forgiveness of debt; or be required to separately disclose land and buildings (for both the financial information and the settlements on the trust)).
- Improving the taxpayer experience by updating guidance, forms and myIR (e.g. to reduce duplication of information collected between IR10 and IR6 forms, and allow the pre-population of trust disclosure details in myIR from previous years).
- Helping trustees collect relevant details about beneficiaries, settlors and appointers by introducing a statutory provision that requires beneficiaries, settlors and appointers to provide the relevant information to trustees.
- Deferring consideration of whether “small trusts” should have reduced disclosure requirements until after the first year of the 39% trustee tax rate returns (the 2024/25 year) have been analysed (which is likely to be mid/end of 2026.
Inland revenue has acknowledged it will take time for some of the recommendations to be progressed, as some will need legislative change and others require software development, however it recommends progressing the recommendations for FYE2025 trust tax returns (excluding the “small trusts” analysis).
Looking ahead, there will be small changes to improve some aspects of the trusts disclosure regime but the rules are here to stay for now.
If you’d like to read the Inland Revenue report, click here.
Contact a member of our Private Client team if you would like to discuss your trust affairs.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
