New Tax Disclosure and Mandatory Financial Statements for Trusts

The low-down on new Trust Disclosures and mandatory financial statements

Trustees, if you’re still coming to terms with the Trusts Act 2019, the new Tax Administration (Financial Statements – Domestic Trusts) Order 2022 (the Order) is set to further increase compliance obligations. The Order sets out minimum standards and new disclosure rules for financial statements prepared by trusts.

The rationale behind the new rules is to enable the Government to determine the extent to which there may be an increased use of trusts following last year’s introduction of the 39% personal tax rate for income in excess of $180,000

Although trust and company rates remain at 33% and 28% respectively, the new disclosure rules support the Commissioner of Inland Revenue’s ability to access compliance with the new 39% personal income tax rate, and in understanding and monitoring trustees use of such structures and entities.

Here’s the gist of things

From April 2022 trustees are required to provide more information on their annual returns for the 2022 tax year onwards. The Order sets minimum standards for financial statements prepared by trusts and applies to all trusts that are subject to the disclosure rules in s 59BA of the Tax Administration Act 1994.

A trustee of a trust who derives assessable income for a tax year must file a return for the tax of all income derived in the corresponding year (s 59BA(1)). This means Trustees should be prepared to disclose:

  1. Financial accounting information, including basic profit and loss statements;

  2. Settlor details and any previous settlors if these details have not previously been supplied to the Commissioner;

  3. The amount and nature of settlements received, and distributions made;

  4. Details of beneficiaries who received such distributions; and

  5. Appointer details.

Financial Statements

As a core requirement of the Order, all trusts must prepare financial statements of their financial position and a statement of profit and loss. We recognise for many smaller trusts, having financial statements prepared by an accountant has not been a necessity until now.

The financial statements must:

  1. Use the double-entry method of recording financial transactions;

  2. Use and disclose which of the prescribed valuation principles (market value, cost or tax adjusted value), have been used in valuing assets and liabilities;

  3. Include a statement of the financial position setting out assets, liabilities and net assets of the trust as at the end of the return year; and

  4. Include a statement of profit or loss showing income derived, and expenditure incurred by the trust, during the return year.  

Financial statements must include a statement of the financial position setting out the assets, liabilities and net assets of the trust as at the end of return year. The statement must be of profit or loss showing income derived and expenditure incurred by the trust during the return year.

Simplified reporting

Trusts that, for the relevant return year, have less than $100,000 assessable income, less than $100,000 deductible expenditure and total assets valued at less than $5 million will be able to engage in simplified reporting. Simplified reporting is essentially financial statements that meet the minimum standards discussed above.

As for larger trusts, the minimum standards are just that, a minimum. Larger trusts will need to be prepared to engage in more rigorous reporting requirements imposed on them by the disclosure rules.

How do I know if this applies to me?  

The requirements apply to trusts that have “assessable income”, typically trusts holding the family home, with no income or expenditure will be considered non-active.

In addition to non-active trusts, Inland Revenue have listed the following trusts as excluded from the requirements:

  1. foreign trusts;

  2. trusts incorporated under the Charitable Trusts Act 1957 or registered under the Charities Act 2005;

  3. trusts eligible to be Māori authorities;

  4. trusts that are widely-held superannuation funds;

  5. debt funding special purpose vehicles and employee share schemes; and

  6. lines trusts est. under the Energy Companies Act 1992.

A trust is non-active for a tax year if, during that income year, the trustee of the trust has not derived any income, has no deductions and has not been party to transactions with assets of the trust which give rise to such income.

What now?  

These new requirements will unfortunately see an increase in the cost of maintaining the trust as a result of complying with these requirements. As such, it may be worth putting some thought into what this could mean for your trust or your duty as trustee.

Will Downey