New Zealand Inland Revenue outlines final requirements under the domestic trust reporting regime

New Zealand’s Inland Revenue (Inland Revenue) is increasingly focused on collecting information from New Zealand taxpayers and, in particular, from high wealth individuals (HWIs) and domestic trusts. One of its objectives is to test the extent to which HWIs and high-income earners are paying the new top income tax rate of 39%. Given there are still tax advantages from operating trusts in New Zealand, the Inland Revenue want to understand if trusts are increasingly being used to receive income that would otherwise be taxed at the higher rate.   

The Inland Revenue have recently released Operational Statement 22/02, outlining what information domestic trusts will need to provide for the 2022 income year. The reporting requirements are more significant than previously expected and include details of individuals related to the trusts (such as trustees, settlors and beneficiaries), transfers of value to and from trusts (whether in cash or otherwise), and copies of financial statements. This information has not been previously required for New Zealand trusts and many trustees will not currently maintain this information. With the deadline for the provision of this information fast approaching, urgent action is required now to satisfy these requirements. 

We have summarised the new reporting requirements below and copied Inland Revenue’s flowchart outlining which types of trusts are included in and excluded from the new rules. We expect these new reporting requirements will result in the restructure of a number of trusts, for example, going forward individuals are likely to establish two separate trusts, one non-active trust to hold those assets that do not generate assessable income (such as the family home) and one trust to hold the assets that do generate assessable income.  

Background

Historically, domestic trusts have been required to disclose a limited amount of information to Inland Revenue. This information was generally provided by filing relevant tax returns (e.g., IR6 form income tax return for estate or trust and IR6B Estate for trust beneficiary details), which declared a trusts taxable income and included distributions to beneficiaries that were subject to tax in New Zealand.

The Taxation (Income Tax Rate and Other Matters) Act 2020 (Tax Rates Act) amended the Tax Administration Act 1994 (TAA) to introduce new rules requiring additional reporting from domestic trusts applying from 1 April 2021 Those rules were mostly set out in section 59BA of the TAA. The Tax Rates Act included limited detail as to what information would be required, leaving the more detailed rules to be determined by Order in Council. The Tax Administration (Financial Statements—Domestic Trusts) Order 2022, released on 11 March 2022, provided more specific details as to the information required.

However, it was not until the recent release of the Inland Revenue guidance in OS 22/02 (Operational Statement 22/02 - Reporting requirements for domestic trusts) was it clear precisely what information would need to be provided. These rules require a trustee of a trust, that receives assessable income, to provide detailed financial and other information to the Inland Revenue on an annual basis, including details of non-taxable transactions and the preparation of Inland Revenue minimum standard financial statements (discussed further below).

Reporting requirements: 

The information that must now be provided by domestic trusts includes:

• Financial statements
  
  Financial statements are required to include: a statement of profit or loss, showing details of income derived and expenditure incurred for the financial year, and a statement of financial position showing all assets, liabilities and net assets of the trust as at financial year end. Amongst other things, the financial statements must be prepared in accordance with accrual accounting, and include: a statement of accounting policies and any material changes therein; an appropriately detailed schedule of the trust’s fixed assets and depreciable property; details of any valuation methodology adopted in valuing assets; and details of certain transactions between trustees and associated persons.  
  
  It is not necessary for these financial statements to be immediately provided to Inland Revenue, but there is a legal requirement to prepare them and for them to be held by the trustee as part of the accounting records and should be available if requested to be provided by Inland Revenue. In addition, certain information from the financial statements is required to be copied to the relevant prescribed forms prescribed by Inland Revenue (e.g., IR 10 the financial statements summary, the IR 6 form income tax return for estate or trust; and IR 6B Estate for trust beneficiary details).
   
• Settlements on the trust
  
  Information required in relation to settlements, broadly, captures all transfers of value to a trust. This requirement means that a trustee must provide full details of the nature and amount of all settlements to the trust (whether in cash or otherwise), including details of associated person transactions (unless they are minor and incidental to the trust’s activities).
  
  
• Distributions from the trust
  
  Information required in relation to distributions includes all transfers of value (unless it is minor and incidental to the activities of the trust) from the trust to a person because the person is a beneficiary (whether in cash or otherwise.
  
  
• Details of settlors, beneficiaries and persons with a power to appoint or remove trustees
  
  The new rules now require detailed information in relation to settlors, beneficiaries and persons with a power to appoint or remove trustees. The information is broader than previously required, and includes details of the name, date of birth, jurisdiction of tax residence, and tax file number or taxpayer identification number.

Simplified reporting 

Simplified reporting rules apply for trusts where all of the following are satisfied: 

• The trustee of the trust derives assessable income of less than $100,000. 
• The deductible expenditure or loss incurred during the income year by the trustee of the trust is less than $100,000. 
• The amount of total assets of the trust as at the end of the income year (or an accounting period if permitted) is less than $5 million. 

Exclusions and exceptions 

 

• Non-active trusts (that have registered with the Inland Revenue using form IR633)
• Bare trusts
• Foreign trusts
• Charitable trusts
• Trusts eligible to be a Māori Authorities
• Widely held superannuation funds (which we expect would cover most retail retirement schemes).
• Certain trusts used for employee share schemes
• Debt funding special purpose vehicles
• Energy line trusts

Next steps

 

If you require any further information in relation to any of the requirements above, please get in contact with one of our tax or funds specialists.