IRD Blindsides Trust Community

On the Morning of the 3rd December 2020 the Government passed legislation under urgency both raising the top income tax rate to 39% for individuals earning more than $180,000 from 1 April 2021, but completely unexpectedly imposing serious new disclosure obligations on trusts from the 2022 tax year on.

The Government cites the need for these increased information disclosures around the fact that trusts, which will remain subject to a 33% trustee tax rate, could easily be used as a conduit by wealthy taxpayers to avoid paying the higher 39% tax rate.

From the 2022 tax year on more onerous disclosure provisions will apply to trusts in their annual income tax return, including:

  1. Financial accounting information, including profit and loss statements and balance sheet items, likely in the form of a modified IR10.
  2. Loans to related parties including disclosure of who the related parties are.
  3. Information on distributions and settlements made during the income year (including identifying information for beneficiaries such as their name, IRD number, date of birth and tax jurisdiction).
  4. Names and details of settlors from prior years (if not already disclosed to Inland Revenue).
  5. Names and details of each person who, under a trust deed, has the power to appoint/dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed.

These new changes have completely blindsided both the trust and the tax community. While it is easy to see that some of this information could be required by the IRD under the common reporting standards international disclosures, citing this as needed to bolster the 39% tax rate was a stretch, to say the least.

It will be interesting now to see whether the IRD intends to go after high wealth individuals who simply transfer their assets to trusts to avoid paying the 39% tax rate. Naturally many of these would have these assets in existing trusts anyway, but for those that do not does the IRD intend to go after them where these assets are earning passive income?

It remains incredulous that the Government can think that it can actually put up the margin on the individual rate, but leave the trust rate at 33%. Time will tell, however.

In the meanwhile, expect a lot of interesting debate over this over the next 15 months to the point when you all have to start filing 2022 income tax returns and complying with these new onerous requirements. Couple that with potentially more disclosures from the IRD around how it intends to administer the 39% tax rate and the consequential avoidance pressures on the tax system, there will be some very interesting reading coming up.

For more details have a look at the Taxation (Income Tax Rate) and Other Amendments Bill.