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Trusts Update: New Tax disclosure obligations for Trustees

26 August 2021
Lifestyle Web 20

The new Taxation (Income Tax Rate and other Amendments) Bill , which gained assent on 3 December 2020, introduces significant new disclosure obligations on Trustees.  The new legislation implements the anticipated new personal top tax rate of 39% for income over $180,000 which takes effect from 1 April 2021.

Company and Trust tax rates are currently unchanged at 28% and 33% respectively however the Bill introduces significant new disclosure obligations for trusts that will take effect from the 2021 / 2022 financial year. The Bill will require Trustees to provide the following information when filing a tax return for a trust:

  • A profit and loss statement and statement of financial position
  • The names birth dates, tax resident information and IRD numbers for every person having the power to add or remove trustees or beneficiaries
  • The amount of every distribution made by the trust along with the names, date of birth, tax residence information and IRD number for every beneficiary who receives a distribution
  • The amount and nature of any settlements made to the trust in the income year along with the names, date of birth, tax residence information and IRD numbers for every settlor who has made a distribution
  • Any other information required by the Commissioner.

The Commissioner of Inland Revenue has the power to request this information back to 2013. Penalties will apply if the information is not provided or if false information is provided. Not every trust is required to file a tax return but if the trust does file a return, Trustees need to ensure that these new obligations are met.

Beneficiary current accounts

It has been common practice for trustees to distribute trust income to beneficiaries on lower marginal tax rates. Although the trust income has been technically been distributed, the beneficiary has not received the funds which sit in the beneficiary current account as a debt owed by the trust to the beneficiary. Sometimes these balances can be large, and often the beneficiary does not know about the funds sitting in the beneficiary current account.

These beneficiary current account balances can have some serious practical implications as the amounts are payable on demand. This means that when the beneficiary asks the trustees to pay the fund, they must be paid to the beneficiary immediately. In many cases, the cash reserves held by the trustees are not enough to meet the liabilities.

Another issue is that beneficiaries are obliged to disclose the beneficiary current accounts as assets when applying for social security benefits, bank loans etc but many beneficiaries do not know they are owed the money.

Recent changes to trust law mean that there is an increased obligation on trustees to disclose information about the trust to the beneficiaries, including the fact that the trust owes money to the beneficiary.

If the amount sitting in the beneficiary current account is more than $25,000  and the trustees are not paying interest on the amount at a rate equal to or greater than the prescribed rate, the beneficiary may be considered a settler. This may not be in the trust, or the beneficiary’s, best interests.

There are limited options available for dealing with the balance in a beneficiary current account.

Often the best option is for the trustees to be open with the beneficiaries and disclose the funds owed to the beneficiary, explaining that the trust is unable to pay the funds at present and agree to pay interest on the balance in the beneficiary current account until such time as the trust is in a position to pay the beneficiary. If there are funds available , it may be prudent to pay the money to the beneficiary.

Some accountants may suggest gifting the balances through journal entries however trustees should be aware that only the beneficiary is able to gift the money and in doing so, the beneficiary may become a settler of the trust. This may not be in the beneficiary’s best interests. Any beneficiary considering gifting their beneficiary current account should seek independent legal  and/or accounting advice before doing so.

If you  are a trustee and you think this might be an issue, talk to the trust’s accountant and legal advisors and make a plan to manage the beneficiary current account balances. Sticking your head in the sand and hoping it will go away is not an option.

If you want specific advice on your situation or trust contact the Life Law Team at Godfreys Law today.