Changes to trust disclosures

Two changes have recently surfaced in relation to trusts and the disclosure of trust information.

Firstly, the Tax Administration (Financial Statements—Domestic Trusts) Order 2022 was made on 7 March 2022. This Order sets minimum standards for financial statements prepared by trusts.

The Order applies to income years ending on or after 31 March 2022 and to trusts that derive assessable income in a tax year. Certain trusts are excluded, such as non-active trusts, charitable trusts and foreign trusts.

Pursuant to the Order, most trusts will have to prepare financial statements that include a statement of profit and loss and a statement of financial position. If a trust has income and expenditure of less than $100,000 and assets of less than $5m it will qualify for ‘simplified reporting’.

If a trust qualifies for simplified reporting the financial statements do not need to include certain information, such as a statement of accounting policies, a fixed asset register and details of transactions between the trust and associated persons (unless the transaction was at a market rate). While financial statements are not actually filed with the tax return, they must be made available to Inland Revenue if requested. In most cases, the Order might be of no effect if financial statements are already prepared.

Secondly, and having a wider impact, the amount of information that is required to be supplied to IRD as part of the trust tax return (IR6) has significantly increased. The additional disclosure required includes:

  • profit and loss, asset and equity information, including disclosure of untaxed realised gains, financial arrangement liabilities with associated persons and drawings (irrespective of whether an IR10 is filed),
  • the amount and nature of all settlements made to the trust in the income year, including a breakdown of settlements in the form of cash, shares, services, land, buildings and ‘other’,
  • the amount and nature of all distributions made by trustees in the income year, including a breakdown of distributions in the form of debt forgiveness, use of property below market value, corpus, trust assets, etc., and
  • the name, date of birth, jurisdiction of tax residence and IRD number of settlors, beneficiaries, and individuals with a power of appointment.

The level of information now required is likely to impact the time and cost required to complete a trust tax return. Inland Revenue has stated in a recent discussion document that it will use the additional information to determine how trusts are being used and what measures could be considered to prevent under-taxation from the use of trusts.

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