When you plant an Olive Tree it is because you either want fruit from it (and possibly oil) or you want it to appreciate its growing beauty.  Trusts are like Olive Trees, the true value and return to the settlor is many years into the future.  Be wise and plant your Olive Trees and manage well your trust obligations with that long term vision.  The Government have introduced new minimum disclosure standards for New Zealand trusts that have assessable income for the 2021-2022 (i.e. the current tax year) and later income years by the Tax Administration (Financial Statements–Domestic Trusts Order 2022 (“the Order”). 

These new disclosure standards apply for income years ending on or after 31 March 2022 and include the requirement for domestic trusts with assessable income to prepare a statement of profit or loss and a statement of financial position.  These changes come following the introduction of a new top personal tax rate of 39% along with other increased disclosure requirements for trusts.  The Government and the Revenue authorities are watching what you do. 

Why have these requirements been brought in?

These increased requirements have been introduced to provide Inland Revenue with more clarity regarding the financial position of trusts.  These new reporting standards enable the Inland Revenue to gather information and monitor the use of trusts to ensure that income is not being sheltered in a trust that would otherwise be income of a person in the top tax tier, and also the Revenue authorities know who is benefiting from the use of trusts for other purposes.  The information gathered may be used for audit and investigation purposes.  “May” should be read as “likely to be”.

What trusts do the changes apply to?

These new minimum standards apply to trusts that derive assessable income in a particular tax year from income years ending on 31 March 2022 onwards.  So, for trusts with an early balance date (before 31 March 2022), the new requirements will apply for the 2022-23 income years and onwards.

The new minimum requirements do not apply to:

• Non-active trusts (that have registered with the Inland Revenue, form IR633)
• Foreign trusts
• Charitable trusts
• Trusts eligible to be a Māori Authorities
• Widely held superannuation funds
• Employee share schemes
• Debt funding special purpose vehicles
• Energy line trusts

What are the new minimum standards?

The following is a summary of the information required to be provided where the trust falls within these new reporting requirements:

• Financial summaries with a statement of financial profit or loss that shows income and expenditure incurred by the trust during the financial year, and a statement of financial position that includes assets, liabilities and net assets of the trust at financial year end.
• Financial statements are to be prepared based on double entry method of accounting and principles of accrual accounting.
• Valuations can be tax values, historical cost, or market values at the discretion of the person preparing the financial statements (though tax value can only be used in relation to assets that produce assessable income).   The valuation method adopted must be disclosed.
• Include a statement of accounting policies and changes
• The financial statements must show
  • Reconciliations in the profit or loss with the trustee’s taxable income
  • A schedule of fixed assets and depreciable property
  • Details of associated person transactions (unless they are minor and incidental to the trust’s activities)

Simplified minimum standards

There are slightly fewer requirements for a “simplified reporting trust” which is where the trust has within each reporting year:

• Less than $100,000 assessable income; and
• Less than $100,000 deductible expenditure; and
• Total assets in the statement of financial position of less than $5 million.

Simplified reporting trusts are also not required to report:

Using accrual accounting; provide a statement of accounting policies; disclose comparable figures for the previous year; disclose reconciliations; include a fixed asset schedule; or provide information on associated person transactions.

Other reporting obligations for all trustees

Trustees must also provide the following information when filing the trust’s annual tax return:

• Details of all settlors as well as details of any settlements, including the nature and amount;
• Beneficiaries’ information including who has received distributions and the amount received;
• Details of persons with power of appointment, to add or remove beneficiaries or amend the trust deed. 

Implications of these new minimum requirements

Overall, these new minimum requirements for domestic trusts will result in increased compliance costs for trustees.  While the changes will affect a large number of domestic trusts a significant portion will also fall into the category of “simplified reporting trust”.  There will also be many that the changes don’t apply to (e.g. trusts that own the family home, but have no income, and who have registered as a non-active trust). 

Useful links:

Below are links which provide further information:

• The legislation
• Special report on the Order
• A webinar on trust disclosure requirements: https://www.ird.govt.nz/about-us/videos/webinars/2022-changes/trusts

If you are unsure of how these changes may apply to your trust, or to you as a trustee, we recommend that you talk to the trust’s accountant or bookkeeper.  If you don’t have one, you should seriously be considering this now.  You are also welcome to contact us at Shellock Consulting Ltd at [email protected].  Don’t get caught out with weeds under your Olive Tree like someone we could name!  Be prepared, gather your information, engage a professional advisor and move on with life knowing that, like the well tended Olive Tree, your trust is in safe hands and will bear much fruit.