From the 2021-2022 income years onwards, the Inland Revenue (IRD) introduced increased disclosure requirements for trusts. The increased disclosure requirements were aimed at supporting the Commissioner’s ability to evaluate compliance with tax rules, develop tax policy, and assist with understanding and monitoring the use of trust structures and entities.
In effect, it appeared as though the Government of the day was trying to gather intelligence to understand how trusts were being used to ‘minimise’ tax liabilities. A cynical person might also hypothesise the information could be used to estimate the revenue that could be generated from a capital gains tax.
In practice, accountants have found the increased disclosures unnecessarily complex (the 2019 trust tax return guide was 57 pages, the 2024 guide is 88 pages) and confusing, which has given rise to
increased cost that invariably is passed onto clients. For example, loans with associated persons are separated from beneficiary current account balances. But the distinction is arbitrary when both amounts represent loans to and from associated persons. The value of shares are to be recorded in one box, but shares held as part of a “wider managed investment portfolio” are to be recorded in a separate box. If a person has a single parcel of Microsoft shares managed by Craigs, which box does it get recorded in?
IRD has now completed a review of the trust disclosure rules to determine whether changes should be made. In its review, IRD acknowledge that certain changes should be made to reduce the compliance costs for taxpayers. Recommendations from the review include reducing granularity by removing unnecessary breakdowns, reducing the number of subjective tests and improving the
guidance and forms. IRD also commented that going forward the development of any changes to trust disclosure rules will take into account whether it will result in additional one-off compliance costs.
Two minor changes from the 2025 income tax return onwards include trustees no longer being required to distinguish between whether a non-cash distribution was a distribution of trust assets, the use of trust property for less than market value, or the forgiveness of debt. Trustees are also no longer being required to distinguish between whether a cash distribution was made from trust capital or corpus. A future change should see information being pre-populated from disclosures in prior years.
Alongside their review, the IRD engaged Cantin Consulting to complete an independent review. Interestingly, unlike the IRD report, this commented on the lack of support these disclosure rules have from taxpayers and their advisors.
The compliance costs coupled with the scepticism around the purposes of these rules has led to the view that these rules are not worthwhile. It also highlighted the view that the rules have given IRD a better understanding of trusts and that without these rules the degree of focus and insights on trusts would not have occurred.
Compliance with the trust disclosure framework has been frustrating for practitioners, hence the review that has now occurred, including the opportunity to provide feedback. The resulting changes are welcome.
