Income-earning Trusts – Important New Tax Reporting Obligations

Income-earning Trusts – Important New Tax Reporting Obligations

If your trust earns income (e.g. from a rental property), there will soon be additional reporting obligations required under the Tax Administration Act 1994 (“Act”). These new reporting obligations will be mandatory from 1 April 2021.

Trust income is taxed at 33%.  The purpose of the amendments to the Act is to ensure that a trust is not being used to avoid the new top personal tax bracket of 39%.  The Commissioner of Inland Revenue (“Inland Revenue”) will have the power to gather information about the use and financial position of income-earning trusts.

For the 2022 income year, the information that Trustees will be required to disclose could include:

  • Personal information about persons who have powers under the Trust Deed (e.g. power to appoint/remove a trustee);
  • The financial position of the trust (e.g. profit and loss statements); and
  • Any distributions and settlements made during the income year.

The information required about trust distributions will include identifying information about beneficiaries such as their name, IRD number and date of birth.  Other information relating to distributions – for example, the source of the distribution – may also be required.

Inland Revenue also has the power to request information for prior years (as far back as the 2014 income year) if that information exists.

These amendments will impose additional obligations and compliance costs on Trustees for income-earning trusts. There will be penalties for non-compliance. Trustees need to be prepared for these changes. It is important that Trustees are aware that these new obligations are more onerous than those for personal taxpayers. Trustees will need to consider whether the protections provided by the Trust are worth keeping when balanced against these additional reporting obligations.  The simple solution may be to transfer income-earning assets from the trust back into personal ownership so that the trust is no longer income-earning.

If you are the trustee of an income-earning trust and want some advice about these changes, feel free to get in touch with someone from our Trusts team as they would be more than happy to assist you.