At the end of last year the Taxation (Income Rate and Other Amendments) Act 2020 (“The Act”), was passed. The Act introduced new information requirements for the Commissioner of Inland Revenue to request “any information that the Commissioner considers relevant for a purpose relating to the development of policy for the improvement or reform of the tax system”.
What is also changing?
Another major change was the introduction of increased disclosure requirements for the trustees of trusts that have assessable income and do not fall within specified exclusions (such as exclusions for foreign trusts, charitable trusts, trustees eligible to choose to become a Māori authority and non-active trusts).
The Act also increases the top personal tax rate to 39% and increases the Minimum Family Tax Credit (MFTC) threshold for the 2020-21 tax year.
What does it mean?
With effect from the financial year commencing 1 April 2021, trustees subject to the requirements will be required to provide a range of information on their annual returns, including but not limited to details of settlements made on the trust; details of distributions made by the trustees; identifying details of each beneficiary (such as their name, IRD number, date of birth and tax jurisdiction) who received a distribution and identifiable details of any person who has power to appoint or remove a trustee, add or remove a beneficiary and amend the trust deed. Also the Commissioner can request “any other information” they feel fit to ask for.
The Commissioner may also require trustees to provide information in respect of any prior income year beginning on or after 1 April 2014, if the information is in the knowledge, possession or control of the trustees. However, under the Trusts Act 2019, trustees are required to have copies of all this information to hand.
These are trusts where the trustees have declared to the Commissioner that the trust is non-active and the trustee has not derived any income during the tax year; and has no deductions; and has had no involvement with trust assets resulting to the generation of income for any person or fringe benefits for any employee.
If your trust is non-active the trustees will need to file a non-active trust declaration with the IRD to be exempt from the new disclosure and reporting requirements.
The disclosure requirements are applicable to existing and new trusts. This additional compliance rests with the trustees but due to the nature and particulars of the information the Commissioner may require, settlors and beneficiaries should also be interested in understanding the changes and what it means for them. Also the Trusts Act 2019 and The Act have increased tTrustees’ obligations for compliance, governance and disclosure to both beneficiaries and the Inland Revenue that means there will be an increase in work and costs to comply with both Acts.
As it appears evident that the Inland Revenue has an interest in trust arrangements, trustees and settlors need to ensure that transactions (and settlements), withstand scrutiny by the Inland Revenue and take early action. If you have any questions in relation to the impact these changes have on you, or whether to retain your trust or wind it up it is recommended you speak to your accountant and lawyer.