The second year of trust disclosures (covering the 2022/2023 income year) continued to expose key compliance trends and challenges faced by trustees and their tax agents.

Inland Revenue’s (IR) findings on the second year of trust disclosures, presented at the Tax Conference in November, along with a 2024 post-implementation review, provided a deeper understanding of the impact of these rules on compliance and policy formulation.

Key insights from 2022/23 Trust disclosures

Trust disclosure rules aim to ensure transparency in the use of trusts in New Zealand and compliance with the 39% marginal tax rate. Some notable findings from the second year include:

• Improved compliance: Approximately 11,500 trusts provided disclosure information in 2022/23 despite not being required to – an improvement from 12,300 in the prior year. Similarly, the number of trusts failing to file required disclosures dropped from 27,700 in 2021/22 to 25,600.
• Overseas beneficiaries: Around 7,000 beneficiaries are based overseas, with half residing in Australia. These beneficiaries were allocated $98 million in income and withdrew $390 million.
• Asset and liability trends: Trust assets increased by $16 billion to $511 billion, while loans to associated parties grew by $12 billion to $69 billion, and borrowings from associated parties rose by $9 billion to $59 billion.
• Compliance challenges: Issues such as invalid IRD numbers and non-disclosed taxable income among social policy beneficiaries remain areas for improvement. Opportunities for education have also been identified around what is required and not required to be disclosed.
• Tax paid by trustees: Tax paid by trustees on behalf of beneficiaries is very low, just 1% of beneficiary income.

Inland Revenue’s post-implementation review

The review conducted by Inland Revenue highlighted divergent stakeholder experiences and ongoing compliance costs. Key feedback included:

• Disclosing financial and non-financial information remains burdensome for many trustees.
• Non-cash distributions are difficult to value and often require clearer guidance.

Smaller trusts feel disproportionately affected by the "one size fits all" approach.

CA ANZ’s call for simplification

Chartered Accountants Australia and New Zealand (CA ANZ) has consistently advocated for practical and impactful changes to simplify trust disclosures and reduce compliance costs for trustees. CA ANZ emphasises the following recommendations:

1. Exempting small trusts from disclosure obligations: CA ANZ suggests exempting trusts with assessable income and deductible expenditure below $100,000, and total assets under $5 million, from detailed disclosure requirements. This approach would reduce unnecessary compliance costs for smaller trusts.
2. Streamlining financial statement requirements: Align trust financial statement requirements with those mandated by the Trusts Act 2019, thereby eliminating the need for duplicate reporting for tax purposes. This alignment would also simplify reporting processes.
3. Clarifying disclosure obligations: Provide clear guidance on minor and incidental non-cash distributions to beneficiaries and non-cash settlements made by settlors, advocating their exclusion from disclosure requirements to prevent unnecessary reporting.
4. Reducing redundancy in reporting: Remove overlapping requirements, such as the need to report beneficiary account movements on a line-by-line basis, which adds complexity without significant benefit.
5. Smarter information requests: Only request data that is necessary, readily accessible, and intended for active use. IR should avoid asking for information already available through other sources or systems.

The road ahead: Reducing compliance costs

The current disclosure regime, while providing valuable insights, underscores the need for a more balanced approach. Simplification would not only reduce the burden on trustees but also enable IR to focus resources more effectively. As CA ANZ highlights, cutting through complexity delivers benefits akin to tax cuts – saving time and money while fostering a more efficient tax system.