2021 Trusts Update
Having a trust in 2021 is nothing like having a trust just three years ago.
Laws affecting trusts have changed significantly and so have the costs of having a trust due to the new duties imposed on the trustees.
Trustees have to comply with the anti-money laundering legislation (AML), common reporting standards (CRS) and sometimes the NZ foreign trust disclosure regime. This year trustees are tasked with navigating the new Trusts Act 2019 and the further disclosure requirements of the Taxation (Income Tax Rate and Other Amendments) Act which became law in April 2021.
Below are some key considerations for disclosure that need to be addressed by trustees in 2021 and beyond.
Disclosure requirements under the Taxation (Income Tax Rate and Other Amendments) Act 2020
The above Act introduced new reporting obligations applying to all trusts earning income from 1 April 2021. The measures which are detailed in section 59BA of the Act have been introduced to prevent avoidance of the 39 per cent top rate of income tax for income earned above $180,000.00, which took effect on 1 April 2021.
The new section 59BA requires trustees of the trusts which earn income to file an annual return including:
- financial accounting information, including profit and loss statements, balance sheet items and other information to be specified by the Commissioner of Inland Revenue – for example, any transfers to the trust by associated persons;
- additional information such as loans to or by related parties; and
- information on distributions and settlements made during the income year.
In addition, trustees of these trusts may be required to provide similar information for tax years as far back as the 2013-2014 income tax year (section 59BAB).
Non-active trusts, incorporated charitable trusts and foreign trusts are exempt from the new Act.
Not only do these new requirements impose significant compliance costs on trustees, but they also create a risk that information obtained may be shared with foreign government agencies under tax information exchange agreements New Zealand has entered into.
Trustees, settlors and beneficiaries alike will need to consider whether it may be cheaper and less stressful for clients who are not likely to be in the top income tax bracket to sacrifice the protections their trust was designed to afford and to distribute income-earning assets back into their own names. Individual taxpayers do not have the same obligations as trustees now have.
Non-active trusts (those with passive assets such as the family home or other non-income-earning assets) are not affected by the new requirements (provided a non-active trust declaration is filed with the Inland Revenue). A choice might need to be made about keeping those assets in a trust and removing the income-earning assets.
Common reporting standard (CRS) (inserted as part 11B of the Tax Administration Act 1994 by section 28(1) of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017)
The Common Reporting Standard (CRS) came into effect in New Zealand on 1 July 2017. The CRS is a multilateral initiative of the Organisation for Economic Co-operation and Development (OECD) that aims to combat global tax evasion by automatically sharing information about foreign tax residents that invest outside of their usual tax residence. There are currently around one-hundred countries that have signed up to the CRS and have started exchanging information.
Trusts can be financial institutions for CRS purposes – with CRS due diligence and reporting obligations. Trusts reporting obligations are a complex topic, which is beyond the scope of this article.
As lawyers we also have CRS obligations in situations where we manage trust accounts (for clients) with other financial institutions (such as banks). In this context, we need to obtain information about the tax residency of our clients (and their controlling persons) and provide this information to the bank so that the bank is able to comply with its own CRS due diligence and reporting obligations. Clients, in turn, have obligations to respond to their lawyers’ requests for this information.
Similarly, where partners of our firm act as a trustee of a client’s trust, from time to time they are required to complete self-certification forms for a bank where a trust’s funds are invested etc. These forms require a trustee to state details of the countries in which they pay tax and provide an individual tax number held in each of those countries (if any).
The obligations on trustees are continuously rising and vigilance on the part of the advisor is critical in navigating these complexities.
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