Tax Talk | Minimum Financial Reporting for Trusts

In conjunction with the increase in the top personal tax rate to 39%, the government enacted new legislation requiring trusts to disclose much more detailed information to Inland Revenue from the 2022 tax year onward.

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Information to be disclosed is:

  • A statement of profit or loss and a statement of financial position
  • The amount, and nature, of each trust settlement made in the year (excluding providing minor services incidental to the activities of the trust)
  • Full details (name, date of birth, country of tax residence, and taxpayer identification number and/or IRD number) of each settlor who makes a settlement on the trust in the income year or whose details have not previously been supplied to the Commissioner
  • For each distribution made by the trustee in the income year, the amount of the distribution and full details (as above) of the beneficiary who receives the distribution
  • Full details (as above) of each person who has the power to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed

Inland Revenue has requested feedback on minimum standards to be applied to the financial statements. The detailed documents are available here and here.

Financial statements will not be required from trusts which are registered as not active. Examples of non-active trusts include trusts which own the family home and derive minimal income (less than $200 annually ). Similarly, financial statements will not be required for bare trust arrangements.

The minimum standards for the financial statements would be similar to those currently required of companies. The statement of profit or loss and statement of financial position would be consistent with the IR10, but the financial statements would also need to meet the following minimum requirements:

  • They should be based on the double-entry method and the principles of accrual accounting
  • They should include a statement of accounting policies and changes
  • Amounts may be disclosed using tax values, historical cost, or market values at the discretion of the preparer of the statements
  • Reconciliations should be included between the accounting profit or loss to taxable income, and of movements, on a line-by-line basis, of all beneficiary accounts
  • Transactions involving associated persons should be included in a schedule unless they are minor and incidental to the activities of the trust.

There will be reduced reporting requirements if the trust is small, meaning it has not derived annual income or incurred expenses in excess of $30,000 during the income year, and the value of total trust assets did not exceed $2,000,000 within that income year. These de minimis amounts only provide partial relief from minimum financial reporting requirements (for example, cash accounting will be acceptable for small trusts).

In addition to the above minimum requirements, the statement of financial position will need to include the following specific items:

  • Associated persons financial arrangements (loans), both interest and non-interest bearing
  • Land, including the valuation methodology
  • Buildings, including the valuation methodology
  • Shares and ownership interests, including the valuation methodology

Acceptable valuation methodologies would be:

  • Tax value, when those values are consistent with double-entry and accrual accounting
  • Historical value, when tax values are not consistent with double-entry or accrual accounting or when, in the preparer’s opinion, historical cost provides a better basis of valuation
  • Market value, when, in the preparer’s opinion, market values provide a better basis of valuation than tax or historical value

A reconciliation of beneficiary accounts would be required, specifically outlining:

  • Beneficiary income
  • Distributions
  • Tax credits allocated to the beneficiary
  • Tax paid on behalf of the beneficiary
  • Drawings

The minimum standards also discuss what would be required to meet the other four broad items of information to be disclosed.  Thankfully, Inland Revenue are taking a pragmatic approach with historic settlors where full information may no longer be available – Inland Revenue will only expect details known to the trustees to be disclosed; at a minimum this would be the name of the settlor but also includes other required information.

The information gathered under these rules could be used for investigation and audit activity.

Comment

These new requirements are going to add a considerable amount of work to the preparation of trust income tax returns, especially where financial statements are not already prepared for other reasons, such as meeting banking covenants.  Ultimately the purpose of this information gathering exercise is to provide government with comfort that trusts are not being used in the way they were in the 2000s to shelter income which would otherwise be derived by an individual on the top personal tax rate.

Given the expanded requirements, we recommend contacting your Baker Tilly Staples Rodway advisor ahead of the end of this tax year to ensure you are best prepared to meet these new requirements.