This article originally appeared in LawNews (ADLS) and is here with permission.
By Anthony Grant
Last December, the government enacted powers giving the IRD the right to acquire a huge amount of information about trusts.
In response, the IRD published an Official Information Issues Paper a few days ago. The public has been invited to make submissions on it by 15 November 2021 – a deadline so tight it suggests the IRD doesn’t want many submissions.
The IRD has also issued a 46-page ‘operational statement’ entitled Reporting requirements for domestic trusts and the deadline for comment on this paper is 30 November 2021.
The explanations the IRD has given for wanting huge amounts of information about trusts that are recorded in these reports is:
- to gain insight as to whether the top personal tax rate of 39% is working effectively; and
- to provide better information to understand and monitor the use of structures and entities by trustees.
The real reason for wanting to get so much information about trusts appears to be a wish on behalf of the present government to tax people associated with trusts in ways they have never been taxed before.
The IRD says its records indicate that about 180,000 domestic trusts report assessable income each year. Many of the people associated with these 180,000 trusts will be affected by the proposed disclosure requirements.
These are some of the changes the IRD wants to implement:
- It wants trustees to prepare annual profit and loss statements and statements of financial position.
- It wants to know who has settled assets on trusts.
- It wants to know who has received benefits from trusts.
- It wants ‘financial information relating to non-business activity’ of trusts.
- It wants to know the amount and nature of each settlement that is made on a trust ‘at less than market value’.
- It wants details of ‘minor services that are incidental to the activities of the trust’ which the trust hasn’t paid for.
- It wants ‘the name, date of birth, tax residence, tax file number, taxpayer identification number of each settlor who makes a settlement on the trust’ (you will see in a moment that the term ‘settlor’ is given a much wider meaning than is used for that term in the Trusts Act 2019).
- It wants the same details ‘of each person having a power under the Trust to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed’.
- It wants a trust’s accounts to record ‘all (interest and non-interest bearing) loans to persons associated with the trust…”
- It wants the value of real estate assets to be given in a trust’s annual financial statements.
- It wants the market value of buildings owned by a trust to be recorded in a trust’s annual financial statements.
- It wants the list of a trust’s liabilities to include ‘all (interest and non-interest bearing) loans from persons associated with the trust…’
- The annual statement of financial position is to record the trust’s equity in three components – the owners’ equity, drawings and current account year-end balances.
- If services are provided to a trust at less than market value, the difference is to be deemed as interest on a beneficiary’s current account.
- If trust property (eg, a house) is ‘enjoyed by the beneficiary… for less than market value’, the sum is to be recorded as a drawing in favour of the beneficiary.
- If services are provided to the trust at less than market value, the value of the services is to be recorded as a settlement on the trust.
- A ‘settlor’ of a trust is to be deemed to include ‘a person who at any time provides, for less than market value, services to the trust for the benefit of the trust that are more than incidental to the operation of the trust’.
- ‘Any beneficiary who is owed an amount by the trust that exceeds $25,000 at the end of the income year and is not paid interest at the prescribed or market rate’ is deemed to be a settlor.
- A distribution from a trust will be deemed to have been made ‘in relation to non-cash distributions such as the provision of services, interest-free loans, or the use of assets by the beneficiaries at no cost’.
- If a trust-owned rental property is made available to a beneficiary, the trustees must record as a beneficiary distribution at the market rent of the property or the distribution at cost.
- When a debt is forgiven due to natural love and affection, the sum involved is to ‘constitute a distribution to the beneficiary’.
The notion that all this information is required to ‘gain insight into whether the top personal tax rate of 39% is working effectively’ is absurd.
The information can be wanted only because the IRD and the present government want to tax people who lend money to trusts at less than market rates, people who get benefits from trusts, people who provide services to trust assets and people who have powers in relation to trusts, as they have never been taxed before.
Readers are encouraged to obtain the IRD’s operational statement (quote reference EDO235) and send feedback to public.consultation@ird.govt.nz before 15 November 2021.
Anthony Grant is an Auckland barrister specialising in trusts and estates law. This article originally appeared in LawNews (ADLS) and is here with permission.
38 Comments
One aspect of my work in the UK was setting up trusts for Inheritance tax purposes. When I came here in retirement some 18 years ago,, I was surprised to find out that many families had trusts and out of curiosity, I asked a solicitor about them. He advised me not to go near them and I was happy to take his advice.
From what I understand, few of them should ever have been set up and their demise is overdue.
"....appears to be a wish on behalf of the present government to tax people associated with trusts in ways they have never been taxed before".
Or to put it another way - to tax those who are trying to avoid.
Could also be seen as anticipation of asset and income testing benefits.
The base & thrust of this legislation passed by this government goes well beyond the issue of trusts. The mechanism empowers the IRD to enquire into, as forcefully as may be necessary, and ascertain the value of all assets held by NZ citizens. This is novel. It also effectively will serve as a precursor to the ambition of The Green Party to impose their fabled wealth tax. The Greens have made it abundantly clear that will not enter into a coalition with Labour without an agreement that it will proceed. The government, have just proven that when they want to, they are well capable of looking forward.
This is looking like the most socialist government that New Zealand has ever had; absolute control on everything (health, energy, water, freedom of movement) all by a party that thinks it does not have to be held accountable simply because it has an absolute parliamentary majority. Did all these things get mentioned in the leadup to the last election? I don't recall so, only Adern saying there would definitely be no new taxes.
Ironic hardly touches that comment as a description. It was partly due to the antics of Muldoon, especially his last term and more especially immediately after he lost the 84 election, that the electorate started to question the seating of virtually unbridled power in one party or in this case, more one individual. Hence MMP. Yet in a manner, unheralded, confusing and somewhat desperate, the NZ electorate used MMP itself to defeat the very nature of MMP, and produce a FPP government. Very odd and it really illustrates that NZ has neither the electorate size nor maturity to make MMP work effectively. The list part, for instance, has seen all parties introduce MPs to parliament that are below par, of dubious character, and should never ever have entered the debating chamber.
Let's not forget that Muldoon's National party won the 1981 election with slightly less votes than Labour - thanks to FPP. I'm not endorsing MMP outright, but any electoral system has it's flaws. And utter munters have always made into parliament in my living memory......
My point was that the trustees don't get any benefits form a Trust, the beneficiaries do. The second point is that tax avoidance is a criminal offence, tax minimisation is not, it's simply using what the law allows so as not to pay too much tax. (I have a Trust so I should know)
Compliance costs? Substantial.
Next step wealth taxes. Why? The Government need more money. When you throw it around like lollies, the paper bag soon empties.
This is nothing about the ‘wealthy’ who the Government seem to despise, yet need. Plenty of middle class kiwis have trusts to provide security of assets for subsequent generations eg the family beach house at Piha owned since the late 60s.
IHA. I hate Ardern
Again, anything the middle class can do to have a glimpse of prosperity is being attacked... soon there wont be a middle class. so I ask myself the question, what govt (or regime) would possibly benefit from having all their subjects rely on them for handouts...???
For some strange reason the government thinks that everyone that has a trust is not paying their fair share of tax. This is totally wrong. All the income tax legislation applies equally to trusts like any other entity. They carry a 33% tax rate, which is 5% higher than the company tax rate. This witch hunt is another example of wasting taxpayers money on unnecessary complexity and compliance costs.
There is nothing more obvious that night follows day, that governments which spend excessively (largely to stay in office) will tax excessively. This government is no different,...in fact may be setting a new benchmark in the spending/taxing tables.
Like the house owners of previous centuries who bricked up windows to avoid paying window taxes designed to dun the wealthy, the inevitable result of the current gummit's spendthrift ways, will be more and more effort by those most directly affected to come up with more imaginative schemes of avoidance.
The collateral damage, as some contributors here have said, will be the further hollowing out of the middle classes who being unable to afford the creative advisors, will simply have their nest eggs raided.
I doubt Labour or the Greens will lose any sleep if they miss their prime target...the "rich pricks" (as a Labour treasurer termed them)
Indeed Analyst, a Trust cannot currently avoid declaring revenue, this is a misconception from people who don't know. You can distribute income from a Trust to beneficiaries in a way the is tax advantageous (i.e. lower income tax bracket) but you cannot hide revenue or avoid tax, which is illegal (I have a Trust)
In many cases, income is usually tax at 33% give the limitations for distributions to beneficiaries under 18. Clearly most comments on here clearly are people that have never work with or understand trusts and how they actually work and based on social beliefs and hearsay...the compliance cost of market valuations etc are huge and level of disclosure exceeds most financial statements. Re define tax and what is based upon clearly is the agenda.
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