With the new 39% tax rate for certain individuals, close scrutiny will prevail on transactions between individuals and trusts. This includes strict new disclosure rules designed to ensure Inland Revenue has clear visibility over these transactions regardless of whether they are taxable.
Before this adaptation, trusts have filed returns declaring taxable income and could include distributions to beneficiaries subjected to tax regulations. They have not, however, been required to file financial statements or provide details on non-taxable transactions. This year this will all change as trusts become required to prepare IRD minimum standard financial statements and to make various other disclosures. Such disclosures include:
Specific details of all settlements on the trust include all transfers of value in addition to complete details specifying those entities/individuals making the settlements.
Note: transfers of value include all things monetary and non-monetary (excluding minor services provided at less than market value).
Details of all distributions (regardless of whether it's taxable and monetary or not), including details identifying the recipients.
Details identifying those with authority to appoint or remove trustees, add or remove beneficiaries, or amend the trust deed.
Any other information required by the Commissioner.
This clearly provides a significant increase in trust compliance in that much of the now-required information is not always readily available and can be difficult to attain. In 2022, this may be particularly challenging for trustees, so you should be thinking about collecting this information ahead of time and as efficiently as possible. Talk to us if you need any help navigating this new space or if you have any questions regarding the best way to acquire and possess all of this information on hand.
Putting aside the difficulty of collecting the required information, it is important to recognize that Inland Revenue can now identify ways in which individuals benefit from trusts other than through taxable beneficiary distributions. It has been made clear from statements made by the Minister of Revenue that if they see recurring use of trusts to fund annual income through capital distributions from income taxed at a tax rate of 33%, strong consideration will be undertaken to raising the trustee tax rate to 39% to match individuals (noting that this will probably apply to the first dollar of that income).
Implications for the traditional use of trusts for asset planning and creditor protection This is something that everyone with a trust would want to avoid, and you should think about whether a trust is the best way to manage your assets.
Other implications of these disclosure rules include the availability of information for sharing with foreign tax authorities under International Exchange of Information Agreements. Before this, non-taxable transactions have usually gone unnoticed. Trustees may have had interest-free loans or capital transactions with foreign beneficiaries that weren't taxed and for which little thought had been given. All trustees and beneficiaries should expect this information to be readily and freely accessible by the foreign tax authority due to the details of beneficiaries being included in their tax residence and file numbers. A spike in interest worldwide has become evident, and expectedly revenue authorities are interested in reviewing this information and identifying those with tax obligations in their country of residence.
A final area that was not as easily visible is capital transactions with beneficiaries.
These could also become more accessible to the Ministry of Social Development. A requirement for recipients of income-tested benefits is that additional income for testing purposes includes non-taxable distributions and taxable distributions. This information was not previously available but provided that there is now an agreement for information sharing between MSD and IRD, it is safe to assume that this will likely become more visible in the near future.
The problem for trustees today is that where the Inland Revenue reviews the 2022 return filed and finds something of concern to them, they can now request the same information for the previous eight years. So, we recommend trustees consider the reporting required for the 2022 year as early as possible to consider what information needs to be collected and what the result will look like. To access this information, we have written a thorough blog on everything you are obligated to provide and the duties you are subjected to in 2022
If you want to discuss your trust disclosure obligations, contact us at your earliest convenience so that you can ensure a smooth sailing process for your 2022 returns.