Managing your trust in 2021
Having a trust in 2021 is nothing like having a trust just some three years ago.
Laws affecting trusts have changed significantly and so has the cost of having a trust due to the new duties imposed on the trustees.
Trustees have to comply with the anti-money laundering legislation (AML), common reporting standards (CRS) and sometimes the NZ foreign trust disclosure regime. This year trustees are tasked with navigating the new Trusts Act 2019 (which came into force on 30 January 2021) and the further disclosure requirements of the Taxation (Income Tax Rate and Other Amendments) Act which became law in April 2021.
Below are some of the key considerations for disclosure that need to be addressed by trustees in 2021 and beyond.
Trusts Act 2019 (“Act”)
The new Act has made disclosure of information to beneficiaries a mandatory exercise. Prior to the Act the trustees had to deal with disclosure only when beneficiaries requested such disclosure through the court (very rarely). Now the trustees must actively consider disclosure of information to beneficiaries on a regular basis.
There is a presumption under the Act that trustees must disclose basic trust information to every beneficiary and possibly more trust information to beneficiaries who request it.
The obligation to make this information available is an ongoing one. Trustees are required to consider at reasonable intervals whether they should be making the information available.
Before providing any of the information, trustees must consider certain factors. If the trustees reasonably consider that they should not make the information available to every beneficiary, they may withhold basic trust information or refuse a request for further trust information from all or certain beneficiaries. For example, in a case where the trustees think that a beneficiary is unlikely ever to receive a distribution from the trust, it might be possible for the trustees to arrive to a conclusion that no disclosure about the trust should be given to certain beneficiaries.
All this means that the trustees must consider on a regular basis (at least, annually) the legislation requirements regarding disclosure. As seen above, it is not always a straightforward exercise and will at times require a significant amount of time for trustees to consider, disclose and document their decision regarding the disclosure.
Disclosure requirements under the Taxation (Income Tax Rate and Other Amendments) Act 2020
The above Act introduced new reporting obligations applying to all trusts earning income from 1 April 2021. The measures which are detailed in s59BA of the Act have been introduced to prevent avoidance of the 39 per cent top rate of income tax for income earned above $180,000.00, which took effect on 1 April 2021.
The new section 59BA requires trustees of the trusts which earn income to file an annual return including:
- financial accounting information, including profit and loss statements, balance sheet items and other information to be specified by the Commissioner of Inland Revenue – for example, any transfers to the trust by associated persons;
- additional information such as loans to or by related parties; and
- information on distributions and settlements made during the income year.
In addition, trustees of these trusts may be required to provide similar information for tax years as far back as the 2013-2014 income tax year (s 59BAB).
Trustees are not required to file a return under s59BA if the trustees are required to file a return under section 59D (which relates to foreign trusts).
Non-active trusts, incorporated charitable trusts and foreign trusts are exempt from the new Act.
Not only do these new requirements impose significant compliance costs on trustees, but they also create a risk that information obtained may be shared with foreign government agencies under tax information exchange agreements New Zealand has entered into.
Trustees, settlors and beneficiaries alike will need to consider whether it may be cheaper and less stressful for clients who are not likely to be in the top income tax bracket to sacrifice the protections their trust was designed to afford and to distribute income-earning assets back into their own names. Individual taxpayers do not have the same obligations as trustees will now have.
Non-active trusts (those with passive assets such as the family home or other non-income-earning assets) are not affected by the new requirements (provided a non-active trust declaration is filed with the Inland Revenue). A choice might need to be made about keeping those assets in a trust but removing the income-earning assets.
Common reporting standard (CRS) (inserted as part 11B of the Tax Administration Act 1994 by section 28(1) of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017).
The Common Reporting Standard (CRS) came into effect in New Zealand on 1 July 2017. The CRS is a multilateral initiative of the Organisation for Economic Co-operation and Development (OECD) that aims to combat global tax evasion by automatically sharing information about foreign tax residents that invest outside of their usual tax residence. There are currently approximately hundred countries that have signed to the CRS and have started exchanging information.
Trusts can sometimes be financial institutions for CRS purposes – with CRS due diligence and reporting obligations. Trusts reporting obligations are a complex topic, which is beyond the scope of this article.
As lawyers we also have CRS obligations in situations where we manage trust accounts (for clients) with other financial institutions (such as banks). In this context, we need to obtain information about the tax residency of our clients (and their controlling persons) and provide this information to the bank, so that the bank is able to comply with its own CRS due diligence and reporting obligations. Clients, in turn, have obligations to respond to their lawyers’ requests for this information.
Similarly, where partners of our firm act as a trustee of a client trust, from time to time they are required to complete self-certification forms for a bank where trust’s fund are invested etc. These forms require a trustee to state details of the countries in which they pay tax and provide an individual tax number held in each of those countries (if any).
NZ Foreign Trust disclosure (contained in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017).
Foreign trust disclosure law was enacted in February 2017. If the disclosure regime is not complied with by trustees, it will result in the trust losing the income tax exemption presently applying in respect of foreign sourced income, with the consequence that the trustees of the trust will become liable to taxation on the trust’s worldwide income.
The NZ resident trustee is responsible for any communication with Inland Revenue. An annual return must be filed within 6 months of the foreign trust’s balance date (30 September if no balance date) and include a copy of the financial statements and details of any settlements or distributions made during the past year. Upon registration, the Inland Revenue must be provided with the following:
- a copy of the trust deed;
- identify particulars and contact details for settlors, trustees and beneficiaries; and
- information about settlements made from date of formation until the date of application (although there are reduced disclosures where all natural person, non-professional trustees).
Summary
These new laws have brought about increased disclosure requirements in relation to the management of trusts. Clients are understandably confused about the information asked of them and the reasons for needing such information. The increasing volume of information and disclosure required adds to the costs involved in the management of their trusts.