- A simplified reporting trust should be fully exempt from the trust disclosure requirements.
- Financial statement requirements for trusts should align with the record keeping requirements under the Trusts Act 2019.
According to CA ANZ NZ Tax Leader John Cuthbertson FCA, we have received member feedback that the requirements imposed by the domestic trust disclosure rules are compliance cost intensive and confusing. Amendments should be made to reduce the scope of the domestic trust disclosure rules.
A mismatch between the tax treatment of a beneficiary distribution made under section HC 6(1)(b) of the Income Tax Act 2007 and the trust information to be disclosed in the trust return of income can be taken as an example.
When compiling year end trust financial statements and tax returns, it is quite common to include in the beneficiary account income amounts paid after year end within the parameters of section HC 6(1)(b). In some cases, this may result in the beneficiary account exceeding $25,000 at the end of the tax year for tax purposes, thereby causing the beneficiary to be a settlor. If so, it is not certain what disclosures would be required in the context of settlors, amounts and nature of settlements, and for beneficiaries and distributions received. It can also create confusion with respect to aspects of the tax return not matching the financial statements.
CA ANZ recommends section 59BA of the Tax Administration Act 1994 (TAA) be reduced in scope to achieve an acceptable balance between the desire to collect relevant information about trusts and the compliance costs imposed on taxpayers.
Specifically, a simplified reporting trust should be fully exempt from the trust disclosure requirements.
According to CA ANZ, a simplified reporting trust is generally a small trust. So information obtained from disclosures made by a simplified reporting trust would not make a meaningful contribution to assist the Commissioner to monitor compliance with the 39% individual tax rate and increase his understanding of trusts and how they are used (these being the objectives of the domestic trust disclosure rules).
Under the Tax Administration (Financial Statements – Domestic Trusts) Order 2022 (the Order), a simplified reporting trust is required to prepare financial statements that comply with the Order, albeit with slightly reduced disclosure requirements. The requirements in the Order are detailed and apply tax principles and do not align with the trustees’ duty under the Trusts Act 2019. Requiring a simplified reporting trust to comply with the Order imposes additional compliance costs that far outweigh any benefits. The Order should be amended to fully exempt a simplified reporting trust from the trust reporting and disclosure requirements.
The financial statement requirements for trusts should also align with the record keeping requirements under the Trusts Act 2019.
As mentioned above, the requirements for financial statements for trusts set out in the Order do not align with the trustees’ record keeping obligations under the Trusts Act. Additional compliance costs are therefore imposed on trustees in order to comply with the trust disclosure requirements. This burden is further compounded with Inland Revenue not requiring the financial statements prepared under the Order to be filed with the trust tax return.
CA ANZ recommends the Order be amended to allow trustees to use the records they prepare and keep under the Trusts Act to comply with the disclosure requirements in section 59BA of the TAA, with any ‘gaps’ bridged by appropriate and relevant additional workpapers.