Trust law changes and tax

There’s not really anything specifically for tax with respect to the upcoming trust law changes.  The focus is very much around transparency, empowering and improving the rights of beneficiaries.

However, coupled with a recently introduced Bill, and notwithstanding the tax law hasn’t fundamentally changed, it is perhaps timely to consider some trust aspects from an income tax perspective.

Introduction of a 39% tax rate

We love a good trust in New Zealand, but we are starting to see a quick change in sentiment and people starting to question their usefulness in light of the pending law changes (to take effect from 31 January 2021).

It’s always good to assess the usefulness of your structures, but please do not be blinkered and focussed solely on the new communication requirements to beneficiaries in considering winding a trust up.

In particular, Labour’s 39% tax rate announcement also noted that the trustee rate would remain unchanged at 33%.   However, recently introduced legislation also adds further disclosures to help the Commissioner manage and assess compliance with the new 39% tax rate.  This new legislation was a bit of a surprise to us (and many others) and unusually was enacted without wider consultation.

In particular, trustees will also be required to provide the Commissioner with:

  • Profit and loss statements;
  • Balance sheet items; and
  • Information on distributions (IRD number and date of birth of beneficiaries) and settlements made during the year;
  • Any other information specified as required.

The Commissioner also has the discretion to gather information in prior years (no earlier than the 2013/14 income year).

While there is a potential 6% tax differential of benefit to consider, any saving must be contemplated in light of the potential costs of complying with a trust structure.  Can you live with the extra communication?  And, certainly in this climate, we would also recommend having an eye on tax avoidance; what would the Commissioner say about any structural changes?  We do not have much guidance on this at the moment, but suspect that given these were rushed through that there is thinking still to be done as to what her position may be.

Changing structure

Changing your company shareholder from a trust to an individual has potential income tax consequences for the company.  Companies can only carry forward imputation credits and/or tax losses if shareholder continuity is maintained (66% and 49% respectively).  This means that broadly the same shareholders remain in the seat at the time the imputation credits/tax losses arose to utilisation. 

Removing a trust and replacing a company shareholder may therefore affect the ability to carry forward imputation credits or tax losses (note we are expecting new legislation with respect to tax losses relaxing the rules) and you’ll lose their value in the process without due care and attention.

Transparency and disclosure

Tax legislation currently requires disclosure for certain types of trusts.

New Zealand trustees of foreign trusts are already required to make various disclosures to Inland Revenue and pay a fee.  The type of information that is required (not necessarily exhaustive) is the name of the trust, who the settlors are and when settlements were made, residence of the settlor, details of beneficiaries and a copy of the trust deed.

This is all part of the drive for international transparency.  If you fail to disclose, the foreign trust cannot avail itself of the concessionary treatment for foreign-sourced amounts.  Penalties may also apply if the information is incorrect, whether knowingly provided as incorrect or otherwise.

The information collected can be shared by Inland Revenue with the Department of Internal Affairs and the New Zealand Police.  Yes, it’s just a disclosure, but don’t be mistaken, it can have significant implications.

Changes to maximum duration period

The timeframe allowing a trust to remain in existence will increase from 80 to 125 years.  This begs the question, what happens when a trust ceases to exist for tax purposes?

If the trust is a GST registered person, GST registration will cease and all the assets employed in the GST activity are deemed to be disposed of for market value with GST output tax following. This could result in adverse cashflow implications; for example, if you aren’t prepared and/or can’t claim an equal and opposite GST input tax credit in the receiving entity.

From an income tax perspective, the property of the trust will also be considered disposed of (and reacquired) for market value.  If the property is of a type that is subject to income tax, taxable income will arise.

Again, its something to plan and be ready for; a tax cash cost arises, with no incoming cash receipt.

If you have any questions or are looking for more information, you can watch our Eye on Tax discussing the 39% tax rate, or alternatively please refer to your friendly BDO Adviser.