Trust rules keep focus on high-wealth Kiwis

Are you considered well-off or a high earner by average standards? Then you’ve probably felt the effects of government initiatives focused on ensuring the wealthy pay their “fair share”. Now it’s turned its gaze to trusts, with the implementation of new reporting requirements.

Time to read: 4 mins

Certain domestic trusts that earn assessable income must now disclose earnings, financial position, settlements, settlors, distributions, beneficiaries, and powers of appointment (read our earlier article here).  

Inland Revenue has imposed these requirements to gain insight into whether the top personal tax rate of 39% is working effectively and to better understand and monitor the use of trusts and their financial positions. The implication, of course, is that it’s concerned about tax avoidance. Inland Revenue can ask for records dating back to the 2013-2014 income year, if that's considered necessary.

Kiwis have had a sweet spot for trusts. There was a feeling that, if you didn’t have one, you were missing out. Until recently, little needed to be done to run them once they had been set up. Now, the Trusts Act 2019 requires a lot more if trusts are to remain compliant. Further, Inland Revenue now requires increased disclosure not just of trust income but also the identity of settlor and beneficiaries, and details of who benefits and how.

Baker Tilly Staples Rodway Christchurch tax director Spencer Smith says Inland Revenue increasingly uses artificial intelligence to screen data these days and people are receiving more unsolicited enquiries about transactions. While the IRD has shown leniency during COVID-19, there are already signs that this attitude is changing.

He notes that in the 2022 Budget, Inland Revenue is to receive $154 million over the next five years to fund 240 full-time equivalent employees to address rising levels of unfiled returns and debt.

Mr Smith also notes from Revenue Minister David Parker’s speech at Victoria University last month that the increased scrutiny of trusts might ultimately result in a proposal to lift the trust tax rate from 33% to 39%, in line with the top personal tax rate.

“If I’m being cynical, I suspect that the Minister’s already inclined to take this step,” he says. “However, he knows that he needs this data collecting process to begin a discussion about a tax policy change heading into the next election.”

Current tax benefits aside, two of the main reasons people have trusts are privacy and discretion. The new disclosure rules include a requirement to declare who is using the trust assets (unless minor and incidental). Some will consider these questions an unwarranted intrusion by the state into their family matters and privacy.

The relevance of some of the information to Inland Revenue’s job of assessing taxable income has not been adequately explained.

Disclosing revenue and how much wealth is sitting in trusts could also potentially expose beneficiaries of New Zealand trusts to enquiries from offshore tax authorities and make them a target elsewhere in the world.

David Parker has stated that there are safeguards in place to protect privacy, but Baker Tilly Staples Rodway Auckland tax associate director Daniel Merckle says in this age of automatic information exchanges, privacy is understandably high on people’s list of concerns.

If trustees and beneficiaries are sharing information with Inland Revenue, it’s natural for them to wonder whether it might fall into other hands, and who else might find out their details and how much wealth their trusts hold, he says.

It will be interesting to see how this plays out over time, but it appears that the reporting changes are all about evidence gathering for future tax policy development. The requirements aren’t about ordinary income concepts, they’re driven around how wealth has accumulated, but they do seem likely to result in one thing – more taxes on the so-called rich.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

Trust series

This is part two of a three-part series on the new trust reporting rules.

Part One (published 31 May): Government looks inside use and wealth of trusts
Part Two (published 8 June): Trusts will wear the burden of new compliance costs
Part Three (published 10 June): New trust rules keep focus on high-wealth Kiwis

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