Government raises the bar against trustees and beneficiaries

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Anthony Grant sees an undeclared government desire to tax people associated with trusts in a way they have never been taxed before behind a truncated consultation process on trusts

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 a Document on Official Disclosure Matters A few days ago. The public has been invited to submit submissions by November 15, 2021 – a deadline so tight that it suggests that the IRD does not want many submissions.

The IRD has also published a 46-page “operational declaration” entitled Reporting requirements for national trusts and the deadline for comments on this document is November 30, 2021.

The explanations the IRD gave for wanting huge amounts of information about the trusts recorded in these reports are as follows:

  • to find out whether the maximum personal income tax rate of 39% is working effectively; and
  • 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 seems to be a desire on the part of the current government to tax people associated with trusts in a way they have never been taxed before.

The IRD says its records show that about 180,000 national trusts report taxable income each year. Many of the people associated with these 180,000 trusts will be affected by the proposed disclosure requirements.

Here are some of the changes the IRD wants to implement:

  • He wants the trustees to prepare annual profit and loss accounts and statements of financial position.
  • He wants to know who settled assets on trusts.
  • He wants to know who has received benefits from the trusts.
  • He wants “financial information relating to the non-business activity” of the trusts.
  • He wants to know the amount and nature of every settlement made on a trust “below market value”.
  • He wants details of “minor services which are incidental to the activities of the trust” for which the trust has not paid.
  • He wants “the name, date of birth, tax residence, tax file number, tax identification number of each settlor who settles the trust” (you will see in a moment that the term “settlor” has a much broader meaning than that used for this term in the Trusts Act 2019).
  • He wants the same details “of every person with power under the trust to appoint or remove a trustee, add or remove a beneficiary or change the trust deed.”
  • He wants the accounts of a trust to record “all loans (bearing and without interest) to persons associated with the trust …”
  • He wants the value of real estate assets to be shown in the annual financial statements of a trust.
  • He wants the market value of buildings owned by a trust to be recorded in the annual financial statements of a trust.
  • He wants the list of a trust’s liabilities to include “all loans (interest bearing and non-interest bearing) made by persons associated with the trust …”
  • The annual statement of financial position should record the trust’s equity into three components – owners’ equity, drawdowns, and year-end current account balances.
  • If services are provided to a trust for less than market value, the difference should be treated as interest on a beneficiary’s checking account.
  • If any trust property (eg, a house) is “appreciated by the beneficiary … for less than market value”, the amount should be recorded as a draw in favor of the beneficiary.
  • If services are provided to the trust at less than market value, the value of the services should be recorded as a settlement on the trust.
  • A “settlor” of a trust should 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 which are more than incidental to the trust. operation of the trust ”.
  • “Any beneficiary to whom the trust owes more than $ 25,000 at the end of the income year and who does not receive interest at the prescribed rate or at the market rate” is deemed to be a settlor.
  • A distribution from a trust will be deemed to have been made “in connection with non-cash distributions such as the provision of services, interest-free loans or the use of assets by beneficiaries without charge”.
  • If a rental property owned by a trust is made available to a beneficiary, the trustees must record as a profit distribution at the market rent of the property or the distribution at cost.
  • When a debt is written off because of natural love and affection, the amount involved must “constitute a distribution to the recipient.”

The idea that all of this information is needed to “get a feel for whether the top personal tax rate of 39% is working effectively” is absurd.

The information can only be searched because the IRD and the current government want to tax people who lend money to trusts at rates below market rates, people who benefit from trusts, people who provide services for trust assets and people with trust powers as they have never been taxed before.

Readers are encouraged to obtain the IRD Operational Statement (citation reference EDO235) and send their comments to [email protected] before November 15, 2021.


Anthony Grant is an Auckland lawyer specializing in trust and estate law. This article originally appeared in LawNews (ADLS) and is here with permission.


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