Unveiling the Veil – Time to Tidy Up our Trusts

In line with the recent changes made to the Trust Act (2019) that came into force on 30th January 2021, the Inland Revenue Department has now published their operational statement (22/02) that sets out the reporting requirements for domestic trusts.

Just a few weeks ago, it was still uncertain how the IRD was going to implement these requirements for the recently released Income Tax Returns for the 2022 fiscal year (to 31st March 2022).

It is important to remember the changes introduced by the Trust Act 2019 that presented, amongst other changes, the following information requirements:

Retention of information

The Act requires trustees to keep core trust documents, including:

  • Documents setting out the terms of the trust and variation of those terms
  • Records for trust property and their value
  • Records of trustee decisions
  • Contracts
  • Financial Statements
  • Memorandum of wishes by the settlor
  • Any other documentation relating to the administration of the Trust

Disclosure of information

One of the most fundamental changes introduced by the Act is the presumption that all trustees must make available basic trust information to every beneficiary and general trust information to be made available to beneficiaries who might request it. Albeit, before providing the information the trustees must consider different factors and make a reasonable assessment before disclosing this information. It is important to seek legal advice in order to be prepared for this information disclosures and assess in what cases trustees can withheld providing some information.

IRD reporting requirements for the 2022 fiscal year

In a nutshell the new reporting requirements for domestic trusts are as follows:

  • Must file an income tax return
  • Must comply with additional disclosures
  • Must prepare financial statements

The additional disclosures are information boxes that will need to be completed with the Trust’s income tax return.

There are some Trusts who are exempted from the additional disclosures but must file a tax return, such as: foreign trusts, charitable trusts, trusts that are eligible to be Māori Authorities, widely-held superannuation funds, exempt employee share schemes, debt funding special purpose vehicles and lines trusts.

Don’t panic! Some examples that are relevant to your personal Family Trust

  1. Non-active complying trusts with NO income are exempt from the 3 requirements mentioned previously
  2. Non-active complying trust with income of $200 or less in interest income are also exempt, provided they complete a non-active declaration form (IR633)

Some examples published by the IRD on the OS22/02 that will provide some clarification to your personal circumstances

Example 1 – non-active status

The Mike Anderson Trust owns a residential property that is occupied by Mike Johnson (beneficiary of the trust). The holding costs of the of the property (rates and insurance) are paid by Mike, and he does not pay rent to the trust.

The trust also has a savings account and has advised their bank to deduct withholding tax from interest earned at 33%. The total interest earned for the 2022 fiscal year is less than $200.

The Trust has an IRD number and Mike has historically filed an Income Tax return for the trust returning only the interest income. The trust meets the criteria for non-active status so completes a non-active declaration form for trust (IR633) and sends it to the Inland Revenue Department.

Whilst it continues to meet the relevant criteria the trustees no longer have any obligation to file a tax return and therefore that are not required to comply with the new additional information disclosures.

Note that, if at any stage in the future the trust no longer meets the relevant criteria for being non-active, the trustees must let the IRD know and start filing annual income tax returns.

Example 2 – eligible for non-active status but no declaration made

Same scenario as described in example 1, except for the fact the trustees have not completed a non-active declaration and is required to file an income tax return.

In addition, as the trust has derived assessable income and is required to file an income tax return, the trustees will be required to comply with the full disclosure requirements.

Additional disclosures

• a statement of profit or loss and a statement of financial position

• the amount and nature of all settlements made to the trust in the income year (excluding minor services incidental to the activities of the trust provided at less than market value)

• the name, date of birth, jurisdiction of tax residence, and tax file number/taxpayer identification number of all settlors who have made a settlement on the trust in the income year, or settlors whose details have not previously been supplied to Inland Revenue

• the amount and nature of all distributions made by trustees of the trust in the income year (excluding minor, non-monetary distributions that are incidental to the activities of the trust)

• the name, date of birth, jurisdiction of tax residence, and tax file number/taxpayer identification number, of all beneficiaries receiving such a distribution

• the name, date of birth, jurisdiction of tax residence, and tax file number/taxpayer identification number, of each person having a power of appointment under the trust deed (including the power to appoint or dismiss a trustee, add or remove a beneficiary, or amend the trust deed).

Financial Statements

In addition to the filing and disclosures mentioned above, from 31 March 2022 most trusts will also have to prepare financial statements. Unless a trust is a non-active complying with no income or income of $200 or less in interest (Examples 1 and 2 above), it will have to prepare financial statements. While these financial statements are not filed with the income tax return, they must be available if the Inland Revenue requests to see them.

Should you need support with any of these new requirements, please contact the advisors at Bellingham Wallace led by Mike Atkinson and we will be able to assist you and point you in the right direction.

Issue 130 May 2022