Trust disclosure rules and the transformation of IRD: from tax to information collector

Governments around the world have been creating a web of information, shared throughout the OECD and beyond. From anti-money laundering (AML), to FATCA and Common Reporting Standards (CRS), the amount of information collected and stored in relation to Trusts and individuals has been mounting.

If you’ve recently engaged a lawyer, real estate agent, accountant or bank, then you will have felt the pain of providing significant amounts of information to prove who you are, all while paying for the displeasure to do so.

Unfortunately, I can’t tell you things are going to get better. In fact, for Trustees, they will be getting much, much worse. To better understand what additional information will be disclosed about your Trust, we must first look at why the government believes it needs this information in the first place.

The Panama and Pandora Pages

In 2016, a major leak of documents from multiple foreign law firms revealed how some of the world’s richest hid their wealth in offshore Trusts. Most of the people and places unveiled were not particularly surprising, however the fact that New Zealand was included on the safe-haven list did raise eyebrows.

Tax havens stereotypically have very low to no income tax, and somewhat corruptible officials. In most people’s minds, New Zealand would not meet that brief. However, the key trait of any safe-haven is that it is good at keeping secrets. This means little to no disclosure of a Trust to other countries, in particular the home country of the Trust’s main benefactor. In this sense, New Zealand was complicit, as while we have many international information sharing agreements, we didn’t (until now) keep any national Trust database, and had limited Trust disclosure requirements.

33% vs 39% Tax Rates

Of course, the timing of these additional disclosures is suspicious. The Panama paper scandal was over 7 years ago, so why are we only seeing a significant number of disclosures being requested by the IRD now?

When the 39% top tax rate was announced, the government assured us they weren’t concerned about an abuse of Trusts, as there was already both case law and legislation ensuring Trusts be used appropriately. It seems, however, that this faith has dwindled since 1 April 2021, as the government noted the significant increase of restructuring using Trusts.

This diminishing faith in taxpayers gave birth to our new Trust disclosures which, as you will see, aim to collate core information about Trust income, distributions and settlements. We imagine this information will be the ammunition the Labour government will use to rally voters around sweeping tax changes or increased Trust tax rates in their 2023/24 election policies.

Required disclosures

- Preparation of Financial Statements

Any New Zealand Trust that has taxable income must now produce Financial Statements. This in itself is not entirely problematic. A Trustee has a duty to beneficiaries to retain much of the information contained in Financial Statements, so in this sense it helps Trustees fulfil their duty. It does however lead onto further disclosures to the IRD, as explained below.

- Settlor information

A Trust settlor is someone that provides value to the Trust. This can be in the form of gifts, interest free loans over $25,000, or settlements of property – to name just a few.

Unlike many countries, New Zealand establishes the tax residency of a Trust based on the tax residency of the settlor at the time of forming the Trust. The additional IRD disclosures include settlor names, date of birth, tax jurisdiction, both New Zealand and overseas tax numbers, as well as details about the settlements provided.

This information is key in helping foreign countries determine whether their tax residents are hiding funds in New Zealand. It can also mean a beneficiary could unintentionally become a settlor and be flagged by a foreign government.

- Beneficiary Information

The Trust beneficiary is crucial in helping foreign governments determine how funds are funnelled around the world, and to help our own government discover whether taxpayers are trying to structure their tax down from 39% to as little as 10.5%.

Like settlor disclosures, beneficiary disclosures include the beneficiary’s name, date of birth, tax jurisdiction, and both New Zealand and overseas tax numbers. However, they go a bit further by including the address of the beneficiary, any use of Trust property, and details of any other beneficiary distributions – including those that are not actually paid.

Precisely how this information will be used is difficult to say. However, one thing’s for certain – the time and cost incurred to collect it will become the burden of the taxpayer, not the government.