Our earlier article set out the minimum requirements for financial statements. Having gone to the effort of preparing financial statements to this standard, the accounts are not required to be submitted but must be held by the trustee in case they are requested by IR later. Instead, IR wants certain information copied from the financial statements into its prescribed disclosure forms.

From the profit and loss statement, a new section has been added to the IR 6 (the trust tax return form). The information to be copied for all trusts includes total accounting profit before tax, all tax adjustments (from the separate reconciling statement to taxable income) and untaxed realised gains and receipts. As far as the balance sheet is concerned, the following items must be copied:

• Loans to associated persons excluding beneficiary accounts;

• Land and buildings (must be separately valued);

• Shares;

• Loans from associated persons; and

• “Equity” balances.

Those reading this may be scratching their heads with the constant reference to “equity” in the context of a trust tax return. But we suspect IR want amounts transcribed that will enable data analytics to be run across equity equivalents for both companies and trusts, and so have stuck with the company terminology for this purpose.

IR does explain that for this purpose, “Equity” comprises the net assets of the trust and is to be shown made up of three components:

Owners’ equity (translation: trust corpus);

Drawings (translation: funds and assets withdrawn from the trust by beneficiaries); and

Year-end current accounts (translation: closing balance of all beneficiary accounts at the end of the year).

As noted above, land and buildings must be valued separately at either historical cost, tax value (if the assets produced assessable income) or market value. Trustees can use the most recent ratings valuation to apportion the value between land and buildings. The operating statement contains examples of what to do where different properties are valued using different valuation methodologies, clearly intending these values to be used for the purposes of the financial statements.

If the trust has business income or rental income which is not residential rental income, the trustee will need to complete the IR 10 summary of financial statements, in addition to providing the information above in the IR 6. Alternatively, the financial statements can be provided to IR in this case.

Previously, only the allocation of beneficiary income and tax credits needed to be disclosed in the IR 6B. Trustees will now need to provide a line-by-line reconciliation from opening to closing balance of every single beneficiary’s current account where there has been a movement. The IR 6B (beneficiary details) has been redesigned for this purpose. In the case of a very large trust with lots of beneficiaries, trustees can send in a CSV file. Starting with the opening balance of a beneficiary’s current account, one must:

• ADD all distributions made to that beneficiary (e.g. accounting income, capital gains, corpus, provision of trust property at less than market value, debt forgiveness and any other transfers of value that vest in the beneficiary); and

• DEDUCT all drawings (the provision of trust property enjoyed by the beneficiary, cash or other assets paid out and tax paid on behalf of the beneficiary).

The closing balance of all the beneficiary accounts must reconcile to the financial statements.

A big change for trustees will be to consider what non-cash distributions are made to beneficiaries each year, such as the provision of services, interest-free loans, or the use of assets by beneficiaries at no cost, and then decide if it needs to be disclosed. A common example is rent-free use by beneficiaries of a holiday home held in a trust. Technically this is a transfer of value, and therefore a distribution (which is non-taxable) has occurred in this case. It is clear IR expect the financial statements to reflect the value of these distributions, otherwise the accounts will not reconcile. However, if there has been no reduction in the net assets of the trust, the statement explains that trustees can choose to value the distribution as nil. Again quite why anyone would choose to value these distributions at anything other than nil if they have a choice is not clear. Regardless, the amount of the distribution (i.e. nil or $value), the nature of the distribution and details of the beneficiary must also be disclosed in the IR 6B. Technically even though nil, this is a “movement” that must be disclosed.

There is a caveat here in that if the non-cash distribution is “minor and incidental” it can be ignored. But unhelpfully, IR have not provided any guidance as to what they intend by this. It likely means one-off use by wider family members that are beneficiaries (a few days here and there). But someone still needs to track this to determine what use there is and then decide if it is minor and incidental. Is this by reference to the market value of the benefit provided or time spent at the property? What might be minor and incidental in the context of one trust might not be for another simply based on the value of property within it. Without any guidance from IR, trustees and advisors are going to have to spend time considering what to disclose.

This requirement is completely impractical in our view and it seems likely IR will receive inconsistent or low-quality data from this endeavour given the lack of guidance. IR have not articulated why they need this information or what the mischief is that they are concerned with. The answer simply appears to be so the Government can learn more about where wealth is held and how trusts are being used and most likely to support future tax reforms.

With effect from the 2022 tax return, trustees will be required to file a new disclosure form (IR 6S) for each settlor who makes a settlement on the trust. Bear in mind that the definition of a settlor for tax purposes is broader than just the person named in the trust deed and will capture deemed settlements. In addition for the 2022 year, trustees will need to make a disclosure providing the identification details (i.e. name, date of birth, IRD Number or Tax Information Number and country of residence) of all historical settlors as well, where these details are reasonably available. There is another new disclosure form (IR 6P) for those with a trust power of appointment. This form will be required for each person that has the power under the trust to appoint or dismiss a trustee, add or remove a beneficiary or amend the trust deed.

There will be the trusts that have not been preparing financial statements at all, but merely filing a tax return. For these trusts, there will be additional work in recreating opening balances and determining the value of assets.

For those that have been historically preparing financial statements, there is new information that will need to be included in the financial statements (if not a simplified reporting trust), such as the need to report certain associated person transactions. Refer to our previous article on these rules.

All active trusts, regardless of size, will need to ensure specific accounts are set up in the financial statements to capture the information to be copied to the IR 6 tax return and IR 6B beneficiary details disclosure forms. Software can help with this. The work involved in providing a line-by-line account of every beneficiary’s current account should not be underestimated and could entail a lot of set-up work in this first year of the rules, particularly if the trustee were not aware of this requirement and have not been preparing contemporaneous documentation.

All active trusts, no matter the size will have to monitor and collect information on non-cash distributions (use of trust property, interest-free loans), decide if minor or incidental and decide how to value and disclose. Finally, all active trusts will need to collect identifying details on current and historical settlors, any current and future settlements and information on who has the power to appoint.

Trustees should immediately review these new rules with their tax advisor. It is inevitable that additional compliance costs will result from these new rules, which for some large trusts with many beneficiaries could be significant. We think for many, this issue has until now flown under the radar.