The trusts landscape has changed drastically over the last three years after being relatively consistent for more than half a century. Trusts and trustees in this new environment face higher duties towards beneficiaries and more obligations to be legally compliant. Two major factors contributing to this change are the enactment of the Trusts Act 2019 (Trusts Act) and of the Taxation (Income Tax Rate and Other Amendments) Act 2020 (Tax Amendment Act). This article will touch on both those Acts and what they mean for trusts & trustees.
We have covered the changes to the Trusts Act in two of our previous blogs found below:
(hyperlink here: https://wakefieldslaw.com/blog/thinking-about-becoming-a-trustee/)
(hyperlink here: https://wakefieldslaw.com/blog/stay-in-the-loop-as-a-trustee-major-changes-coming-2021/)
In short, the Trusts Act adds new mandatory and default duties to the role of the trustee. (Default duties apply unless the terms of the trust modify or exclude them.) The Trusts Act also introduces obligations on trustees to disclose basic Trust Information to beneficiaries.
The flagship tax policy that the New Zealand Labour Party campaigned on in the 2020 general election was creating a new personal tax rate of 39% on income earned above $180,000. This new rate came into effect on 1 April 2021 for the 2021-2022 financial year and was expected to affect approximately 2% of New Zealanders. The legislation that enshrined this policy into law was the Tax Amendment Act.
A core critique of raising personal tax rates, from both the left and the right alike (albeit for different motivations), is that the rates can be easily side-stepped if one has a good accountant and lawyer. What is the point of the new tax bracket, if the person can rearrange their affairs so that their trust is earning the income and therefore incurring the lower trust income tax rate of 33%?
The Tax Amendment Act has introduced comprehensive financial disclosure obligations on domestic trusts in an attempt to gain some insight on the effectiveness of the top personal tax rate of 39% as well as enable the Government to better understand and monitor the use of structures and entities by trustees. This new disclosure regime came into effect on 1 April 2021 (ie. from the start of the 2022 tax year). Notwithstanding that start date, IRD also has retrospective powers to request new disclosure information back to 2015 if they have concerns. There are penalties for non-compliance.
These powers and extra disclosure requirements cover all trusts that are required to file tax returns and have an annual income of over $200. Charitable trusts, Māori Authority trusts, foreign trusts and declared non-active trusts are exempt.
The financial disclosures are required to be made in the trust’s annual income tax return from the 2021/2022 tax year and must include information on:
IRD will be targeting trusts that appear to exist solely to escape paying the correct personal tax rate. It is imperative, now more than ever, for trustees to file their paperwork correctly and on time.
These two areas of change mean there are more eyes than ever on trustees and the actions of trusts – IRD, beneficiaries, and the wider Government. There are also more steps to take for a trustee to satisfy their legal duties. More compliance requirements mean more risk of miss-stepping and higher monetary costs for trustees and trusts.
If your trust is a standard family trust that solely owns the family home, you could possibly be exempt from the additional tax scrutiny from IRD (remember to seek professional advice on your particular situation). But, if you have a more complicated trust structure, or a trust that owns multiple properties, you will need to get your ducks in a row. Employing an accountant to ensure the tax obligations are met, and Wakefields Lawyers to ensure that the trust administration requirements are met, is essential if you want to avoid potential penalties or scrutiny from IRD.
Wakefields Lawyers has wide-ranging experience in trust law and the administration of trusts and we can guide you through the pitfalls and hidden traps. It is important to regularly review the trust’s affairs (at least on an annual basis) and consider the value & purpose of the trust structure. You may determine that any benefits of continuing with the trust structure are outweighed by the compliance costs and risks, and that it would be best to wind up your trust. Wakefields Lawyers can discuss your individual situation with you to ensure you proceed in a way that is best for you and the other beneficiaries of the trust.
There is a large volume of commentary on whether the new domestic trusts financial disclosure regime will survive long term. The argument is that the cost of scrutiny to ensure compliance will far outweigh any potential revenue collection for the Government from penalties incurred or by people paying the correct tax. An important point to note is that the tax changes are underpinned by ideals (people should pay their fair share), rather than a straight cost-benefit revenue collection standpoint.
Notwithstanding this point, the domestic trusts financial disclosure regime is now in effect and must be complied with. It may not stick around, but the pain of having to pay penalties or being taken to Court by IRD while it is active certainly will. If you would like more information surrounding the above-mentioned obligations and risks, please contact Wakefield’s Lawyers on 04-970-3600 or email firstname.lastname@example.org.
– Merlaina Donald (Associate)