New tax reporting requirements for New Zealand Trusts
Monday, 4 April 2022
On 7 March 2022, the New Zealand government made an Order in Council significantly increasing the disclosure requirements for taxable domestic trusts. The Tax Administration (Financial Statements—Domestic Trusts) Order 2022 was made on 7 March 2022.
This Order sets minimum standards for financial statements prepared by trusts subject to these new disclosure rules. Trusts with assessable income have increased disclosure requirements for the 2021–22 and later income years. For income years ending on or after 31 March 2022, trustees must now submit a statement of profit or loss and a statement of financial position to the Inland Revenue Department (Inland Revenue). The statements will be used to assess trustees' compliance with the new 39 per cent top rate of personal income tax rate enacted in December 2020. The aim is to help Inland Revenue monitor the use of structures and entities by trustees.
A simplified reporting procedure applies if your trust is a simplified reporting trust i.e.
the assessable income derived during the income year by the trustee of the trust is less than $100,000; and
the deductible expenditure or loss incurred during the income year by the trustee of the trust is less than $100,000; and
the amount of total assets of the trust as at the end of the income year (or as at the end of a period permitted under clause 5(2) in relation to that income year) is less than $5 million.
Non-active trusts, foreign trusts, registered charitable trusts, Maori trusts, large pension trusts, employee share schemes and certain others are excluded from the new reporting rules. Trusts that do not derive assessable income, such as trusts set up to own holiday homes, are also exempt.
If your trust is not a simplified reporting trust the Trustees must under s 5 of the Order:
s. 5 Minimum requirements for preparing financial statements
(1) The minimum requirements for the preparation of financial statements of the trustee of the trust for the purpose of section 21B of the Act are as follows:
Form of financial statements
(a). the financial statements must consist of—
(i). a statement of financial position setting out the assets, liabilities, and net assets of the trust as at the end of the income year (or as at the end of a period permitted under subclause (2)); and
(ii) a statement of profit or loss showing income derived, and expenditure incurred, by the trustee during the income year (or during a period permitted under subclause (2)); and
Principles with which statements must comply
(b). The financial statements must be prepared applying the following accounting principles:
(i) the double-entry method of recording of financial transactions; and
(ii) the principles of accrual accounting; and (under s 6 this requirement does not apply to a simplified reporting trust)
Valuations
(c). the financial statements must disclose amounts of assets and liabilities using 1 or more of the following valuation principles:
(i) historical cost with impairment or depreciation as appropriate:
(ii) tax value, but only in relation to assets that produce assessable income (including income derived on the sale of the asset):
(iii) market value (which may include, as a proxy for the market value, the most recent rating valuation under the Rating Valuations Act 1998); and
(d). the financial statements must disclose the type of valuation principle adopted (whether historical cost, tax value, or market value) for each of the following:
(i) shares or ownership interests:
(ii) land:
(iii) buildings; and
Trustee may choose whether to gross up interest or dividends
(e). when showing interest and dividends received in the financial statements, the trustee may choose whether or not to show those amounts as grossed up for resident withholding tax; and
(f). when showing dividends received in the financial statements, the trustee may choose whether or not to show that amount as grossed up for imputation credits; and
Statement of accounting policies
(g). the financial statements must contain a statement of accounting policies setting out, in sufficient detail so that a user can understand the material policies that have been applied or changed,— (under s 6 this requirement does not apply to a simplified reporting trust)
(i) the policies and assumptions that have been used in the preparation of the financial statements; and
(ii) a description of the effect of any material changes in the accounting policies used since the financial statements prepared for the previous income year (or for the previous period permitted under subclause (2)); and
Matters that statements must show
(h) the financial statements must show the matters prescribed in the Schedule; and (under s 6 this requirement does not apply to a simplified reporting trust)
(i) the financial statements must disclose comparable figures for the previous income year (or for the previous period permitted under subclause (2)), but only to the extent that the trustee has that information. (under s 6 this requirement does not apply to a simplified reporting trust)
(2) Instead of preparing the financial statements on the basis of an income year, the trustee may elect to prepare the financial statements based on an accounting period that the trustee uses for accounting purposes if—
(a) the accounting period ends in the period starting on 1 October in the tax year in respect of which the trustee of the trust is required to file a return under section 59BA of the Act and ending on 30 September immediately after that tax year; and
(b) the trustee of the trust does not, during the tax year referred to in paragraph (a), derive income associated with a business activity.
(3) See also section 45 of the Trusts Act 2019, which requires the trustee to keep certain core documents (including records that identify assets, liabilities, income, and expenses of the trust).
Under the Schedule to the Order:
Matters that trustee must show in financial statements
The matters that a trustee must show in the financial statements are as follows:
Reconciliations
(a) a reconciliation of the profit or loss in the statement of profit or loss with the trustee’s taxable income for the income year; and (under s 6 this requirement does not apply to a simplified reporting trust)
(b) an appropriately detailed, taxation-based, schedule of the trust’s fixed assets and depreciable property; and (under s 6 this requirement does not apply to a simplified reporting trust)
Trusts with particular types of business
(c) if the trustee derives income from forestry, information about the cost of timber as at the end of the income year (or the end of the period permitted under clause 5(2)) and a reconciliation of movements in the cost of timber during the income year (or during that period); and (under s 6 this requirement does not apply to a simplified reporting trust)
(d) if the trust property includes specified livestock, details of livestock valuation methods, valuations, and calculations for tax purposes; and (under s 6 this requirement does not apply to a simplified reporting trust)
Items from prescribed forms
(e) all relevant amounts that any form prescribed by the Commissioner under section 35 of the Act requires to be copied from the trustee’s financial statements.
Examples
The following forms require certain amounts to be copied from the trustee’s financial statements:
the IR10 form entitled Financial statements summary:
the IR6 form entitled Income tax return estate or trust:
the IR6B form entitled Estate or trust beneficiary details.
2 Associated person transactions (under s 6 this requirement does not apply to a simplified reporting trust)
(1) A trustee must also show in the financial statements the matters listed in subclause (2) for each transaction in connection with the trust that is entered into between the trustee and any associated person of the trustee within the meaning of subpart YB of the Income Tax Act 2007. (under s 6 this requirement does not apply to a simplified reporting trust)
(2) The matters are— (under s 6 this requirement does not apply to a simplified reporting trust)
(a) the name of the associated person; and
(b) the nature of the association with the associated person; and
(c) the nature of the transaction, including the amounts involved.
(3) This clause does not apply to a transaction if—
(a) it is a minor transaction that is incidental to the activities of the trust; or
(b) it is at market value; or
(c) the trustee has already separately disclosed the information required by this clause to the Commissioner in a form prescribed by the Commissioner under section 35 of the Act.
The new disclosure requirements will primarily affect about 55,000 domestic trusts that report assessable income to the Inland Revenue but do not currently report business income or file any financial statements.
Sources
Tax Administration (Financial Statements—Domestic Trusts) Order 2022
For more information see: https://www.ird.govt.nz/about-us/videos/webinars/2022-changes/trusts
For some clients with limited trust investments, selling those investments to you personally may make it possible for the Trust to become non-active. Click here for information on how to make a trust non-active...
If your Trust deed has not been updated after 1 August 2019 to comply with the Trusts Act 2019 please email us for a free quotation to update your Trust deed:
reception@rossholmes.co.nz Tel: +64 9 4150099 ext 0.
