The Taxation (Income Tax Rate and Other Amendments) Bill that passed in December 2020 introduced new disclosure requirements for domestic trusts for the 2021–22 and later income years. These changes are intended to improve the transparency of domestic trusts and to help Inland Revenue assess compliance with the new 39% personal income tax rate and understand the use of structures and entities by trustees.
The disclosure rules apply to trustees of trusts that derive assessable income in a tax year (excluding inactive, foreign, charitable trusts, employee share schemes, and trusts that are widely held superannuation funds, among others). The rules require trustees to prepare a statement of profit or loss and a statement of financial position.
The Government has now set minimum standards for financial statements prepared by domestic trusts subject to these new disclosure rules. These apply for income years ending on or after 31 March 2022.
We have outlined below what information must be provided in your annual return.
- Trustees must provide financial statements that consist of:
- a statement of financial position setting out the assets, liabilities, and net assets of the trust as at the end of the return year, and
- a statement of profit or loss showing income derived and expenditure incurred by the trust during the return year. It will include net profit or loss before tax, any tax adjustments and any untaxed realised gains and receipts.
- Trustees will need to provide details of the valuation methodology applied to the Land, Buildings and Shares/Ownership interests categories of assets. A trustee can choose to adopt a different valuation method for each of these categories. Valuation of assets and liabilities can be either at market value, cost or tax adjusted value at the discretion of the trustee.
- Financial statements must be prepared using the double-entry method of recording financial transactions.
From the 2022 tax year onwards, more information will be required about a trust’s earnings, settlements and settlors, beneficiaries and distributions, and persons with powers of appointment.
Trustees will need to provide:
- The details of any person who has made a settlement on a trust, as well as the amount and nature of any settlement made from 1 April 2021.
|Settlors and Settlements||You will need to provide the settlors:
You will also need to provide details of any settlements made during the year, including cash, financial arrangements, land, buildings, shares/ownership interests, services, settlements that have been valued at zero and other (with a description).
- The details of any person who has received a distribution from a trust, and the amount of the distribution.
|Beneficiaries and Distributions||You will need to provide the beneficiaries’:
You will also need to provide details on any movements in beneficiary accounts, including:
- The details of people who have the power to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed.
|Person with power of appointment||When adding a person with power of appointment, you must provide their:
Persons with power of appointment cannot be added/edited when filing the income tax return, but they will be able to be added or updated at any time through myIR.
As mentioned in our earlier article ‘New disclosures for domestic trusts’, the new requirements significantly increase compliance for domestic trusts. Trustees should be starting to think about how to collect this information, particularly in the first year this information will need to be provided (the 2021–22 income year). We hope the above provides some certainty to trustees regarding specific information to be collated and submitted to the Inland Revenue.
Our William Buck advisors can provide additional support. If you have any questions or need advice – we’re here to help.