New Bill requiring active trust’s to file annual reports with Inland Revenue
Thursday, 03 December 2020
Draft legislation increasing the Inland Revenue disclosure requirements for trustees of trusts has just been published by the New Zealand Government.
The measures in the Taxation (Income Tax Rate and Other Amendments) Bill have been introduced to forestall avoidance of the 39 per cent top rate of personal income tax, which will take effect from 1 April 2021 for personal earned income above NZD180,000.
According to Government:
“The Bill would clarify the legislation to ensure that the Commissioner of Inland Revenue (the Commissioner) can collect information for tax policy purposes. It would also introduce a rule to allow for the collection of information from trustees to assess compliance with the 39% rate and to understand and monitor the use of structures and entities by trustees.“
The Bill includes two proposed information-gathering measures:
increased information required on trustee annual returns from the 2021–22 income year (including the ability for the Commissioner to request this for [any period after the end of the 2013/14 tax year], and
clarifying the information-gathering powers of the Commissioner.
These measures would ensure that the Commissioner has access to the information required to provide high quality tax advice.”
The Bill introduces a clarifying amendment to ensure that the Inland Revenue can collect information solely for tax policy development purposes. The Bill will “provide Inland Revenue with more information on the use and financial position of trusts, and to remedy the current information deficit.”
Specifically, the Bill's new s.59BA requires trustees to file an annual return including:
a profit-and-loss statement and a statement of financial position;
the amount and nature of each settlement to or distribution from the trust; and
the name, date of birth, jurisdiction of tax residence, tax file number and taxpayer identification number of each settlor and beneficiary, and each person having a power under the trust to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed.
Proposed section 59BAB(1)(c) makes it clear that trustees are only required to provide the requested information if it is within the knowledge, possession or control of the trustee.
Non-active trusts, charitable trusts and foreign trusts are exempt from the new Bill.
Minister of Revenue David Parker said he was aware that some people may seek to sidestep the higher tax rate and shelter their income in trusts. 'If trusts are used for the sole purpose of paying a lower tax rate, it is unfair to all those New Zealanders that pay the right amount of tax', he said. 'If there is evidence of this type of behaviour we will move on it.'
These measures are unrelated to the major reform of the country's trust law which come into effect on 30 January 2021 in the form of the Trusts Act 2019.
The present requirements:
Trustees are already required to provide a return under the Tax Administration Act 1994 where they have derived income for an income year. As part of the return, trustees are already required to include information on income allocations to beneficiaries and identifying information for the beneficiaries.
Some types of trusts, such as trading trusts, already return financial statement summary information.
The information required for distributions is similar to the information Inland Revenue collects about beneficiaries as part of the current tax return process, where there is an allocation of income to the beneficiary.
My comments:
Trusts have not been used for tax minimisation purposes for many years - since the top tax rate was reduced to 33%. Most wealthy families already use companies owned by trusts as their investment vehicles. Many of the 2% of the population earning over $180,000.00 p.a. already have trusts formed for genuine asset protection purposes which own investment companies or own investments. Labour’s new tax policy now results in trusts having taxation benefits, but only for the 2% of the population earning over $180,000.
Trusts with limited investments should simplify matters by the Trust selling those investments to the settlors, with the purchase price being satisfied by a Deed of Loan from the Trust to the settlors upon demand and without interest (cost $360.00). That Deed of Loan is needed as it is recognised by Work and Income as a liability. The Trust can then be made non-active and avoid the need to file tax returns and avoid the need for these new disclosure obligations.
In deciding whether a trust is non-active, IRD will not take into consideration bank, or administration costs that total $200 or less for the year, interest earned of under $200 on any trust bank account, reasonable fees paid to professional trustees to administer the trust, and expenditure that is incidental to the upkeep of a property owned by the trust, if they are incurred by trust beneficiaries: section 43B Tax Administration Act 1994.
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