Trust Disclosure Regime

After the introduction of the Trust Disclosure rules in March 2022, in November 2023 Inland Revenue released a high-level summary (in the form of a 40-page report) of insights from the first year of reporting.

While tax advisors and clients alike may have begrudgingly completed the disclosures initially, the statistics may prove to be interesting.

The stated purpose of the trust disclosure rules was to provide insights into the way trusts are used, and to ensure compliance with the 39% individual tax rate. The information gathered included reporting on details of settlors, individuals with powers of appointment, beneficiaries, and various financial information.

A recurring theme throughout the report was the level of errors, but not surprising given the complexity of the disclosure rules and it being the first year. Of the 226,000 IR6s received, the errors included:

• 26,000 trusts provided no financial information but had indicated that they were required to comply.
• An additional 16,000 trusts only completed the IR10 but did not complete the financial information section of the IR6.
• 49,000 trusts provided no settlor details.
• 450 instances of beneficiary distributions to minors that exceeded $1,000.
• 300 trust beneficiaries who owe student loans failed to disclose their trust distributions.
• 1,400 Working for Families recipients that failed to disclose their trust distributions.
• 500 instances where income had been allocated to tax-exempt beneficiaries even though the distribution had not been paid.
• 3,500 trusts retained trustee income despite having ceased in the same year.
• 250 instances of beneficiary income being allocated to offshore beneficiaries that had not been included in a NZ non-resident tax return.

Conversely, there were also numerous trusts that complied with the rules despite not being required to – including 35,000 trusts filing nil tax returns, of which 11,500 provided financial information.

Other key insights into trust income and assets included:

Total trust assets amounting to $470 billion, which was up from $240 billion reported on the IR10 in 2016.

•  $91 billion of trust assets comprising shares and $191 billion comprising land and buildings.
• 16,000 trusts reported untaxed realised gains of $14 billion. This compared to 5,000 trusts which reported $4 billion in untaxed realised gains in 2016.

• The amount of beneficiary income allocated to individuals earning over $180,000 dropping from $900 million in 2020 to $450 million in 2022.

As a result of the information gathered, the Government may consider policy reform to address some of the issues identified – such as implementing a two-month payment notification requirement for beneficiary distributions to charities, in line with Australia’s regime. Greater scrutiny of Trust tax affairs is expected, especially as the Government has   provided additional funding to complete audits and investigations.