Following amendments to the Tax Administration Act 1994 in December 2020, trustees of certain domestic trusts will be required to prepare financial statements and provide extra information with their income tax returns. These statements must be included with the annual return for the 2021–22 and later income years.
Who will be affected?
According to Inland Revenue, around 180,000 domestic trusts (with the exclusion of estates) report assessable income each year and may be affected by the new disclosure requirements. However, the financial statement disclosure requirements will primarily affect around 55,000 of these domestic trusts. These are trusts that report assessable income to Inland Revenue but do not currently report business income or file any financial statements.
Trusts that do not derive assessable income are not required to file a return and the disclosure requirements do not apply. These may include, for example, trusts that own holiday homes and derive no assessable income, charitable trusts registered under the Charities Act 2005, or non-active trusts where a non-active trust declaration has been filed with the Commissioner.
What will be required?
Minimum financial reporting requirements for financial statements have been proposed.
- Trustees will need to prepare a statement of financial position setting out the assets, liabilities, and net assets (equity) of the trust as at the end of the income year, and a profit and loss statement showing income derived, and expenditure incurred, by the trust during the income year.
- The financial statements must be prepared using the double-entry method of recording financial transactions and the principals of accrual accounting.
- The financial statements must include a statement of accounting policies and changes.
- Amounts may be disclosed using tax values, historical cost, or market values at the discretion of the preparer of the statements.
- The statements should include a reconciliation of the trust’s financial statements and taxable income for the income year, and a reconciliation of movements from opening to closing balances, on a line-by-line basis, of all beneficiary accounts, including loans.
- Transactions involving associated persons should be included in a schedule unless they are minor and incidental to the activities of the trustee.
Small trusts (where annual income or expenditure is under $30,000 and total value of trust assets is under $2,000,000 during the income year) will be exempt from applying the principles of accrual accounting (cash accounting will be acceptable for small trusts), providing a statement of accounting policies, and disclosing comparable figures for the previous income year.
From the 2021-22 tax year trustees of domestic trusts will also be required to make disclosures in their annual returns about information on settlements and distributions as well as appointer details. The purpose is to test compliance and the effective operation of the 39 per cent tax rate and to further understand what trustees do with trust assets and income.
Trustees will be required to provide:
- The nature and amount of any settlement made on the trust during the year
- The details of anyone who is a settlor of the trust
- The amount of any distributions made during the year, and the details of the beneficiary who received the distribution
- Details of any person who has powers to appoint or remove trustees and beneficiaries or amend the trust deed.
When will this take effect?
Trustees will need to provide financial statements and additional information for the 2021–22 and later income years. However, the proposed minimum requirements for the financial statements is currently out for public consultation. Inland Revenue is seeking feedback on the minimum standards for financial reporting by trustees (including whether small trusts should be partially exempt from these requirements). Submissions close on 15 November 2021. Inland Revenue is also seeking feedback on the draft operational statement which sets out the approach to applying the trust information gathering powers. Deadline for submissions is 30 November 2021. Further information on the consultation process and how to provide feedback can be found here.
The new disclosure requirements significantly increase compliance for trusts. This is because the information to be disclosed may not always be readily available. It’s likely the first year (i.e., the 2021–22 income year) will be particularly challenging, therefore trustees should start thinking about how to collect this information.
It is recommended trustees consider the reporting required for the 2021–22 year as early as possible. This includes the information that needs to be collected and how it will be perceived by Inland Revenue when they review this information. For trustees with financial records that have not been adequately maintained, it is advisable that you get them up to date as soon as possible.
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