IRD details extensive reporting requirements for domestic trusts

28 October 2021

The Inland Revenue Department (IRD) has released a draft operational statement regarding significant new information reporting requirements brought in for the trustees of many domestic trusts late last year. It has also released a discussion document addressing the scope of proposed new minimum standards for trust financial statements.

The Taxation (Income Tax Rate and Other Amendments) Act 2020, passed under urgency in December 2020, introduced two significant changes to the reporting requirements in the Tax Administration Act 1994.

The first was the introduction of sweeping new information collection requirements for the Commissioner of Inland Revenue (the Commissioner), which empowered the Commissioner to request “any information that the Commissioner considers relevant for a purpose relating to the development of policy for the improvement or reform of the tax system”. The Commissioner appears to have recently exercised this new power to survey a number of high-wealth New Zealanders regarding the nature and source of their assets.

The second change was the introduction of new information reporting requirements for the trustees of domestic trusts that have assessable income and do not fall within specified exclusions (including exclusions for foreign trusts and charitable trusts). Trustees who are subject to the new requirements will be required to provide a wide range of information in their annual returns, including:

  • A statement of profit and loss and a statement of financial position for the trust.
  • Details of settlements made on the trust in the income year.
  • Identifying details of each settlor who has made a settlement on the trust in the income year or those whose details have not previously been supplied to the Commissioner.
  • Details of distributions made by the trustee in the income year.
  • Identifying details of each beneficiary who received a distribution from the trust in the income year.
  • Identifying details of any person who has the power, under the trust deed, to appoint or dismiss a trustee, add or remove a beneficiary, or to amend the trust deed.
  • Any other information required by the Commissioner.

The Commissioner may also require the trustees to provide the specified information in respect of any prior income year beginning on or after 1 April 2014, if the information is in the knowledge, possession or control of the trustees.

The IRD estimates that the new disclosure requirements will impact up to 180,000 domestic trusts.

The new reporting requirements do not apply to the trustees of non-active trusts. A family trust that holds no assets other than a family home (or holiday home), occupied by trust beneficiaries on a rent-free basis, would typically be a non-active trust.

The draft operational statement

The draft operational statement provides further detail regarding the circumstances in which trustees may be subject to the new information reporting requirements and the type of information that is likely to be required, including:

  • The circumstances when a trust will be regarded as “non-active”.
  • The circumstances in which there may be a “settlement” on or a “distribution” by a trust for tax purposes.
  • Detailed guidance regarding the information to be included in financial statements for a domestic trust (we expect that this guidance may be revised to reflect feedback gathered in response to the discussion document, see further below).
  • The operation of a simplified disclosure regime for small trusts.
  • How the new regime will affect trustees who are currently required to file an IR10 Financial statements summary.
  • The application of the new information disclosure requirements to estates.

The closing date for submissions on the draft operational statement is 30 November 2021.

The discussion document

The discussion document outlines proposals for the minimum requirements for financial statements, to be incorporated in secondary legislation (similar legislation already prescribes minimum requirements for companies and foreign trusts). The introduction of these minimum requirements is separate from, but closely connected to, the new information reporting requirements. The IRD estimates that the minimum requirements will affect around 55,000 domestic trusts.

The IRD has proposed that the minimum requirements for financial statements would be based on the following principles:

  • The statements should be based on the double-entry method of recording financial transactions and the principles of accrual accounting.
  • The statements should include a statement of accounting policies and changes.
  • Amounts may be disclosed using tax values, historical cost, or market values at the discretion of the person preparing the statements.
  • The statements should include a reconciliation between the profit or loss in the statement of profit and loss to taxable income. They should also include a reconciliation of movements from opening to closing balances, on a line-by-line basis, of all beneficiary accounts.
  • Transactions involving associated persons should be included in a schedule unless they are minor and incidental to the activities of the trustee.
  • While disclosure of specific financial items in the annual return is proposed, there is scope for judgment on the level of detail beyond this.

The IRD has proposed that a simplified regime would apply to small trusts, which would provide partial relief from the minimum requirements (for example, cash accounting would be permissible). A small trust would be defined as a trust that, for an income year:

  • derives no more than NZ$30,000 of income; and
  • incurs no more than NZ$30,000 of expenditure; and
  • holds assets with a total value of no more than NZ$2,000,000.

The closing date for submissions on the proposed minimum requirements is 15 November 2021.

If you have any questions about how the new trust reporting requirements might affect you, please get in touch with the contacts listed, our your usual Bell Gully adviser.

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.