Trust Rules Tighten Under New Top Tax Rate

Tighten Trust Rules

This year the top tax rate increased to 39%.  That means Inland Revenue also need to make other tweaks to the tax rules so that all the various tax rates line up.

Because the tax rate for trusts is 33%, there’s an opportunity for people to pay less tax by diverting money into trusts, perhaps in the form of dividends. That can still happen, but if people abuse this system the Inland Revenue (IR) is likely to take action to prevent them from doing so. So the IR wants to keep a close eye on the situation, which means more information is required from trusts.

What’s changing for trusts?

If you have a trust, you’ll now need to provide more information to Inland Revenue each year, to help the IR confirm that tax avoidance is not occurring.  This applies for all annual returns from the 2021-2022 financial year onwards.

The information that trusts will be required to provide now includes:

  • Profit and loss statements
  • Balance sheet items
  • Other specified information such as transfers by associated persons, which might include loans to or by related parties.

Trustees’ own annual returns will also need to include information on distributions and settlements made during the year.

Non-active and charitable trusts are exempt because they are not required to file a trust return.

You can read more about the new compliance rules here.

Worried about paying more tax?

Although you can’t completely revamp your structure to specifically avoid paying the new higher tax rate, this is a great time to review the way your various entities and arrangements are structured. It may be that your previous structures were designed around the old tax rate and they could be adjusted to better suit the new rules.

While trusts used to be a straightforward way to protect your wealth, they are now more complex and nuanced.  Compliance is more onerous and expensive, so if you do have a trust, it is vital to comply with all the regulations, otherwise you risk it being declared a ‘sham’ trust and lose any potential advantages.

We can help you review your set-up and give you advice on whether a trust is worthwhile.

Give us a call on 09 366 7025 or email us at hello@smefinancial.co.nz to get in touch.

Together we can achieve more. 

Exemptions, New Builds And More: Answers On New Property Rules

New Property Rules

Back in March, it took everyone by surprise when the Government changed its rules on interest tax deductibility for property investors, and extended the bright line test. We had a lot of questions that didn’t seem to have answers.

Now we have some guidance, because Inland Revenue has released a Q&A document covering a long list of questions about the new Government proposals for interest limitation and adding to the bright-line rules.

Here we’ve summarised some aspects of the approach that Inland Revenue has taken, and you should talk to us for more clarity around the rules for your particular situation.

What is exempt from the new limitations?

Taxation remains unchanged for:

  • Retirement villages
  • Developments, including build-to-rent and some remediation work
  • New builds (certified after 27 March 2021)

The new rules do not affect your main home.

How does the new build exemption work?

The new build exemption still hasn’t been finalised, but there are a few options being considered, including a perpetual exemption and a time limit of 10 or 20 years.

Tenants, boarders, Airbnb

Here it seems that if the person is staying within your house, there are no limits on interest deductibility. Once they’re housed in a separate dwelling, even if it’s on the same property (a granny flat for example), interest deductibility limitations will apply.

Transferring home ownership and the bright-line test

Currently, moving your home into a family trust can trigger the bright-line test. However, there is a proposal for the transfer to be effectively ignored under certain conditions. There is also a proposal to ignore a land transfer to a look-through company or partnership. Our advice? Don’t make any sudden moves on this one without talking to us first.

Helping kids into first homes

The IR provides this example: you took out a loan to help your child buy their first home, and your child pays you interest. You pay tax on the income and claim deductions on the interest. In this instance, the interest limitation rules would not apply to you.

However, if you own a second property and rent it to your child, or another family member, interest limitation rules would apply.

It’s complicated…

The new taxation regimen starts to kick in from 1 October 2021. If you own properties that might be affected, please get in touch – we can show you ways to make these rules easier to understand and comply with.

We can also run the numbers to show you how much difference these regulations will make to your overall financial position over the next few years. Should you sell up now or keep holding? We can give you the information you need to make smart decisions.

Give us a call on 09 366 7025, email us at hello@smefinancial.co.nz, or visit our website https://smefinancial.co.nz to get in touch.

Together we can achieve more.