Trust Rules Tighten Under New Top Tax Rate

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.