Trusts with assessable income that are required to file a tax return now face increased disclosure requirements to better enable Inland Revenue to assess compliance with the new top personal 39% tax rate. This assessment includes understanding and monitoring the use of structures and entities by trustees.

An Order in Council has been issued and further guidance is to be provided by an operational statement on the minimum requirements that trustees must adhere to for preparing financial statements. Inland Revenue has broadly listened to CA ANZ and other submitters on points of detail to make required financial statement disclosure more practical. Unfortunately, there has been no movement on our two biggest concerns:

• the absurdity of requiring trustees to expand time and cost preparing financial statements to a minimum standard when Inland Revenue don’t want those statements filed with the trust tax return; and
• the on-going requirement for small (referred to as “simplified reporting”) trusts to also prepare financial statements with limited concessions rather than being excluded from disclosure.

The minimum financial statements are intended to support the disclosures required to be made in the expanded 2022 IR 6 Trust return form and, it should be noted that most disclosures already exist. Early balance date trusts gain a reprieve and are not required to comply with the order in council until their 2023 income year.

In a departure from the accounting convention, what constitutes trust “financial statements” for the purposes of the Order in Council has an extended meaning. In addition to a balance sheet, P&L and statement of accounting policies, it also “includes any notes giving information relating to those [financial] statements.” The companion special report refers to “notes and other supporting material”.

Accountants and trustees would typically consider this additional information to be their supporting work papers rather than forming “part” of the financial statements. This is a concession as it is clearly intended that these additional materials can be used to support required disclosures.

Key concessions made in the finalised Order in Council:

Increased threshold for ‘small’ trusts with assessable income and deductible expenditure less than $100,000, and total assets total assets less than $5M at balance date. In addition, bright line income and expenditure is specifically excluded.

• Asset valuation methods can now be chosen at discretion of trustees.
• Legislative amendment to exclude disclosure of minor and incidental non-cash distributions to beneficiaries from disclosure.
• Reduction in scope of associated persons disclosures with limitations on types of association caught and no disclosure required if transaction at market value.
• Removal of requirement to disclose beneficiary account movements on a line-by-line basis.
• Removal of requirement to gross up reported dividend income for imputation credits in the financial statements. Trustees will be able to choose to do this if they want.
• Tax fixed asset schedule no longer required to be included in the financial statements.