The new trust disclosure rules were launched effective from 1 April 2021 and initially felt like an IRD witch hunt to “catch/punish” those who had had set up a trust. Initial IRD explanations were clumsy and poorly executed, which was not reassuring.
Why have a trust?
Most people set up a trust to protect their assets from risks, such as business risks, relationship risks, succession of family wealth, and so on. These are legitimate reasons to set up a trust.
But if you have a trust then you need to maintain it by way of regular trustee meetings, financial reporting, and ongoing administration/maintenance. If you are not prepared to maintain your trust (and incur associated costs), then you should close the trust completely.
If you are reaching retirement and/or your business risks are reduced, you may consider winding up your trust. However, be aware that a trust can help protect your adult children from their relationship risks. And if you enter a new relationship then your trust may help protect you and your family if correctly structured and maintained.
You will have to comply with the new IRD disclosure rules if…
- Your trust derives assessable income (unless they meet non active criteria and make a non-active disclosure), and
- Your trust is not a non-active trust, a foreign trust, a charity / Māori authority, superannuation fund/employee share scheme etc
Simplified Reporting
Although all trusts are required to prepare financial statements, the good news is these may be simplified to reduce compliance costs.
The other good news is that details of settlements and beneficiary payments are limited to the current year so there is no need to trawl through decades of historical records to obtain this information.
From an accounting perspective the simplified reporting makes more sense once you understand IRD objectives – the disclosure boxes don’t “add up” in the way an accountant would expect them to. Indeed, it is about disclosure of certain selected items, not double entry accounting.
IRD disclosure terminology is also confusing, especially for trust experts such as Q2 Ltd – for example, a trust does not have “drawings” or “owner’s equity” yet IRD require these disclosures.
Summary
The new trust disclosure rules are a starting point and will be refined by IRD in coming years. For trustees already maintaining their trust to a high standard, the new disclosure rules should be a piece of cake. But for those who “set up and forgot” about their trust then there is work to be done.
The protection that a trust offers is only as good as its ongoing administration and trustees.
Contact Q2 Ltd if you would like to discuss the new trust disclosure requirements and how they affect you.