Trusts have traditionally been used for intergenerational protection because; a trust can be used to determine how a person’s money should be managed and distributed while that person is alive, or after their death. With over 500,000 active Trusts in New Zealand at this time, they remain a very important part of our society and economy. Because they are still so prevalent, it is important to understand them, and the ever evolving legal amendments around them.

The most common reasons for setting up a Trust have been: 

• Intergenerational asset protection
• Protect personal assets from creditors
• Set aside money for special reasons such as family members’ education
• Ensuring personal financial security by protecting assets in the event of a divorce
• Ensuring our children keep their inheritances (not their partners)
• Convenience for spreading income and wealth to its beneficiaries with possibilities of tax minimisation

TRUSTS ACT AMENDMENT 2022

All trusts have required extra due diligence for AML (Anti-Money Laundering) which passed into legislation for accountants in July 2018. Trusts continue to be increasingly examined and broken up through litigation during court proceedings; with the Trusts Act 2019 coming into effect to try and improve the transparency of Trusts and their associated recordkeeping, this has been achieved in part due to additional responsibilities placed on Trustees. 

Inland Revenue has a renewed interest in the transfers of wealth between parties – historically this information has been diligently hidden in Trust balance sheets, and we don’t even know about these as a Trustee’s accountant. The taxation amendment act of 2020 to the Trust Administration Act 1994 was introduced by an order in council, and then received royal assent into law late March 2022.

NEW RULES

For March balance dates, the rules apply from 1st April 2021. The applicable Trusts are any Trusts with taxable income and/or a requirement to file an income tax return. So any trusts that do not receive any taxable income should not be affected by these new rules eg. a family trust that holds a family home and no other income.

The new rules also impose increased responsibilities on Trustees, including: reporting, transparency, and governance requirements. 

• Summary new Trust Act Changes provided with permission from Botting Legal as a start point
• Recommend you contact your Trust lawyer to update your Trust Deed and become informed
• Trust Administration now needs to be documented and evidenced

NEW IRD TRUST TAX REPORTING REQUIREMENTS

The IRD are also reviewing Trusts and how they are being used.
To gain visibility over this, the IRD has implemented a new reporting requirement effective as of tax year ending 31 March 2022. This change contains additional compliance requirements which we will email to you as: New 2022 Trust Questionnaire. The questionnaire covers this additional information IRD now requires, and also provides an estimate for accounting fees.

Key points to note:

• Relates to NZ domestic Trusts.
• Non Active Trusts – are exempt from new reporting requirements
  • This includes Trusts that earn less than $200 interest and have no deductions in a tax year
  • Non Active Trusts – must file Non active Trust declaration
• Active Trusts will be captured by a new reporting regime
  • This includes active Trusts that earn assessable income (e.g. Dividends, rents, interest > $200, royalties etc) and makes deductions
  • This requires a full set of financial statements being prepared for the 2022 Tax year
  • To get a correct starting position, it may require looking backwards to compile prior period transactions, distributions, to compile preparing these Financial Statements
  • In addition to the financial reporting there will be additional disclosures requiring capturing details not previously asked for, including IRD numbers of Settlors, those with Power of Attorney, and the beneficiaries
  • These changes will come with increased compliance costs to operate an Active Trust
• Annual Trust Review – Please get in touch with one of our team to book a meeting for a Trust Review including: the purpose of the Trust, what has changed since its establishment, reviewing the cost and reward of maintaining the Trust (is the benefit still there?).
• This review is a combination of legal and accounting advice regarding your Trust/s.

FUTURE IMPLICATIONS

• Unlike Companies which have Company Details displayed as a public record on the Companies Office, Trust information has been private domain. There is no central Database of Trusts, Settlors, Trustees, beneficiaries.
• This collection of information will be used by the IRD to compile a de facto national database of Trusts in NZ, which will have future implications in shaping tax policy in New Zealand.
• This visibility of Trusts and how they are used are likely to see some changes in regards to Tax treatments. E.g. Income tests regarding eligibility for student loans, or certain benefits.
• The increase of the top tax personal tax rate to 39c changed people’s views of Trusts; they became more attractive for tax planning purposes with a 33c rate cap.
• What other changes flow from this will be a wait and see approach. We hope that any changes to Tax treatment of Trusts would not be piecemeal and Ad Hoc; but part of an overall fair and proportionate review of the Tax system. It’s likely to be the next Government elected that will implement the changes (if any).

Please contact us if you would like help with your Trusts or to find out how the change in law may affect you.