Trust Financial Disclosure Requirements

If you are a trustee, you will be aware that there have been several legislative changes during the year regarding New Zealand Trusts.  Our previous newsletters have provided information around the new Trusts Act 2019 and in particular, trustee obligations and the new rules around disclosure to beneficiaries.  As well as these changes, the Taxation (Income Tax Rate and Other Amendments) Bill was passed - the top personal tax rate increased to 39% and new financial reporting requirements for trusts were introduced.

From the 2021-22 tax year, most trustees will need to prepare financial statements for the trust and provide additional information with their income tax returns.

Trustees will be required to provide (for the trust):

• Statement of profit or loss and statement of financial position (prepared to the minimum prescribed standard).
• The nature and amount of any settlement made during the year.
• The details of anyone who is a settlor of the trust.
• The amount of any distributions made during the year, and the details of the beneficiary who received the distribution.
• Details of any person who has powers to appoint or remove trustees and beneficiaries or amend the trust deed.

Proposed minimum standards for financial statements are based on the following principles:

• The statements should be based on the double-entry method of recording financial transactions and the principles of accrual accounting.
• The statements should include a statement of accounting policies and changes.
• Amounts may be disclosed using tax values, historical cost, or market values at the discretion of the preparer of the statements.
• The statements should include a reconciliation between the profit or loss in the statement of profit and loss to taxable income and a reconciliation of movements from opening to closing balances, on a line-by-line basis, of all beneficiary accounts.
• Transactions involving associated persons (as defined in the Income Tax Act 2007) should be included in a schedule unless they are minor and incidental to the activities of the trustee.
• While disclosure of specific financial items in the annual return is proposed, there is scope for judgement on the level of detail beyond this.

These new rules have been introduced to provide the Government with additional visibility and comfort that trusts are not being used to avoid tax, especially by individuals on the top personal tax rate. Unfortunately, these requirements will likely result in additional accounting work, particularly if your trust doesn’t currently have financial statements prepared.

There are some exceptions for small trusts and non-active trusts, and we will provide more information regarding this in the new year. In the meantime, we suggest trustees become aware of the extended requirements in preparation for your trust’s year end.  We are here to help you navigate these changes.