Government mulls fix for rushed tax law that looks into who stays at the bach

The rules have implications for many of New Zealand's approximately 180,000 domestic trusts, but especially on trusts that own holiday homes where income is generated to cover running costs

Kiwi families who own baches through trusts could face a fresh compliance headache this year, with IRD requiring the disclosure of the names and tax details of all family members that stay over.

New rules that were rushed into law under urgency at the end of 2020 mean that from the March 2022 tax year, trusts that have any income assessable for tax purposes need to record any distributions to beneficiaries, including those that do not involve money changing hands.

The rules have implications for many of New Zealand's roughly 180,000 domestic trusts, but are likely to be felt keenly on trusts that own holiday homes where income is generated to cover running costs.

Where the holiday home is owned through a trust but has some income - such as family members paying enough for accommodation to cover the upkeep - any beneficiary who stays for free or even pays less than the market rate has to have their name, date of birth and IRD number recorded and provided to the IRD.

The rules also require the disclosure of the details of anyone who provides a settlement to the trust, meaning a friend who helped out by painting the bach for free while on holiday would need to have this "gift" recorded to the IRD.

Tax experts say the new rules will provide almost no useful information to the tax department, yet could create a large additional compliance requirement.

Recent IRD advice stated that for non-cash distributions to beneficiaries, the amount could be recorded as nil.

While this will reduce some of the compliance requirements to a box-ticking exercise, one trust adviser warned this could have an unintended flow-on effect for the Government's attempts to monitor foreign trusts.

Revenue Minister David Parker. Photo Mark Mitchell

The Government appears to see that the requirements it set are too onerous and will require a legislative fix.

Revenue Minister David Parker said in a statement he may make a retrospective amendment to the law, aiming to remove the need for "minor and incidental non-cash distributions" to be disclosed.

But IRD said in a statement that it expects trusts to gather information to comply with the current rules.

The disclosure rules were included in legislation rushed through Parliament in November 2020 when Labour fulfilled its promise to introduce a new top personal tax rate of 39 per cent on income over $180,000.

The way the law was passed - and by implication Parker himself - was sharply criticised by the Law Society, with the legislation tabled in Parliament minutes before it was first debated. Within days it passed into law, without any input from the public or tax experts.

Other provisions of the same legislation are being used by IRD to demand almost 400 wealthy New Zealanders hand over details of their wealth and the wealth of their children.

Parker said the trust provision requirements were an attempt to establish whether taxpayers were using trust structures to effectively avoid the new 39 per cent personal tax rate.

The disclosure requirements also aimed "to gain insight into the use of structures and entities by trusts".

Mike Shaw, a director at tax advisory OliverShaw, said IRD was now requiring disclosure of a large amount of material it had no need for and could already ask for if it believed a trust was breaching the rules.

"If they thought they did [need the information], why haven't they been asking for it for the last 20 years?" Shaw said.

"It's just mind-boggling that we're getting down to requiring this in legislation, when [the commissioner] can ask for it if she wants it."

The cost of compliance spread across tens of thousands of trusts could easily be in the tens of millions of dollars and he did not believe Inland Revenue would learn much from the new disclosures.

"Hand on heart, for all that stuff they're now requiring to be disclosed, I cannot see any reason why they need it for a tax purpose," Shaw said. "This is going to cost tens of millions of dollars of compliance costs. What's IRD going to do with all the information? I don't know."

Although IRD first consulted on the disclosure rules in early 2021, submissions on the rules from the industry only closed at the end of November, meaning guidance was unlikely before February or March, the end of the tax year the disclosure rules are meant to cover.

"Everyone's going to have to retrospectively backfill once they know what they've got to do," Deloitte partner Joanne McCrae said.

IRD was examining minimum thresholds for disclosure or rules which could stipulate who is the principal beneficiary, McCrae said, but as the rules stand, they could create "horrendous" compliance requirements.

"As yet, we have no meaningful clarification of what they will look like. They understand the problem but the legislation is quite clear. Anyone who received a benefit from the use of property owned by a trust is technically receiving a distribution."

McCrae said Deloitte had been involved in "quite extensive" discussions with IRD on the issue. She had told IRD officials the rules should not apply until the March 2023 tax year because "no one knows what it is you want".

Act leader David Seymour said the new disclosure rules showed Labour had taken an ideological approach to trust policies that assumed people who had adopted a trust structure for legitimate reasons were attempting to hide ill-gotten gains.

"All of a sudden you find the tax man pushing into parts of people's lives in ways you never imagined, even if there's no point to it."