Small trusts in the crosshairs of new disclosure rules
The Government should be mindful of the compliance burden it is placing on thousands of small trustees with new disclosure requirements, as it seeks to find out whether they’re being used to circumvent the new 39% tax bracket, says Chartered Accountants ANZ.
In its current form, the legislation requires trustees to provide a range of new information to Inland Revenue about their trust’s activities.
The issue is that trusts are mainstream in New Zealand, and not just for the rich.
“We’re a nation of small business owners, and a lot of them will have their family assets in a trust to protect them from creditors,” said CA ANZ NZ Tax Leader John Cuthbertson.
A recent Stuff.co.nz article estimated that New Zealand was one of the most ‘over-trusted’ countries, with 450,000 trusts.
“A balance should be struck between what is required to be disclosed, and the time and cost burden that puts on trustees.”
All domestic trusts that derive assessable income will be required to file a tax return subject to the new disclosure rules. There is currently a minimum threshold of $2 million in assets, and $30,000 of assessable income.
"A balance should be struck between what is required to be disclosed, and the time and cost burden that puts on trustees.”
“The threshold would capture about a quarter of all houses in Auckland if they were held in trusts.”
However, being below these thresholds is of limited benefit as they only serve to reduce the level of disclosure required at the margin. In CA ANZ view, small trusts that fit within the thresholds should not have to make any additional disclosures – that is they should be fully excluded.
Information requested should also serve a valid purpose. “It’s not unreasonable to expect that if all this information is provided, that it will be used, and that once it’s provided, trustees don’t get asked for it a second time,” continued Mr Cuthbertson.
In the current income year, trustees will be required to prepare financial statements and accounting policies, but not file them with Inland Revenue. Instead, trustees will be required to provide specific financial disclosure in a prescribed form.
CA ANZ believes that compliance would be best served if Inland Revenue simply prescribed the minimum information that they required trustees to provide.
“The legislation should set clear standards on what information is required, and then the onus is on trustees to meet those standards. Mandating that financial statements be prepared simply to support the metrics actually disclosed is compliance overreach, with real costs to trustees.”
“A particular area where the disclosures make no sense is around non-cash settlements and distributions.”
“Having to determine that your neighbour is a settlor of the trust, because they mowed your holiday house lawn, or that wider family members received a distribution because they stayed over on a long weekend without payment, doesn’t benefit the apparent objectives of the Government, and it’s going to be a tedious exercise for trustees.”
CA ANZ also believe it will be difficult for many trustees to provide details of all past trust settlors.
“In many cases the information requested will have already been provided to Inland Revenue as the trust deed is required to support an application for trust IRD number.”
Submissions on both the Officials issues paper and draft operational statement covering reporting requirements for domestic trusts closed recently. It is hoped that any legislative changes will be made, and guidance provided by 31 March this year.
