Family trusts: Why they will cost you more as Inland Revenue hovers

The cost of having a family trust could be able to rise. Photo / Getty Images

The cost of operating a family trust is set to rise just as many of those who use trusts face increasing costs in their businesses and personal lives.

New trust disclosure rules came into force from April 1 last year in a bid to make trusts - of which there are around 180,000 in New Zealand - more transparent.

That means trusts are now being asked to provide extra information about their earnings, financial positions, settlements, settlors, distributions, beneficiaries and powers of appointment to the Inland Revenue Department.

Spencer Smith, a tax director at Baker Tilly Staples Rodway, said that meant the cost of administering a trust had gone up.

"Most trusts now that have any income will be required to produce at least a basic set of financial statements. And if they earn more than $100,000 or have expenses of more than $100,000 then they are having to prepare quite detailed financial statements with notes included.

"If they haven't been doing it before they are up for another $1000 in fees when you start adding financial statements to the equation."

He said many trustees also wanted to have a professional trustee on board to help administer the trust now they were required to have meetings and more rigour around decisions made by the trust.

"That cost has also gone up because you can't just set and forget like you used to."

Professional trustees like lawyers had in the past acted more as a rubber stamp on decisions made by the other trustees, he said.

"[They] were presented with a fait accompli - oh we have sold the house or - we have just signed for a mortgage - can you sign here please?

"All of that stuff now - there is an expectation from the professional trustees that there will be some consultation in advance. And they also need to be aware of who the beneficiaries are and are they properly informed about what is going on in the trust."

Smith said many of those who used trusts were small business owners who had placed their own homes into trusts, and were already facing escalating costs from inflation, supply chain challenges and mortgages.

Trusts that don't have any income can apply to be non-active or dormant. And some other trusts such as foreign, charitable and widely-held superannuation schemes are excluded from the new rules.

Smith said he was also concerned about some of the information being collected by the Inland Revenue and what this information could be used for.

Under the new rules trusts will have to disclose any distribution which is a transfer of value from the trust to a beneficiary.

As well as capturing any cash payouts trusts will have to tell the IRD if they are giving any interest free loans to beneficiaries and if the trust owns a family home or bach which a beneficiary uses and does not pay market rent for.

"It is not only monetary transfers they are also looking for anything the trust owns which the beneficiaries get the use of whether it is an interest free loan or a house."

Those doing the accounts for the trust also had to monetise that benefit to show an opening and closing account balance for any beneficiary.

Smith said currently there were no tax implications for beneficiaries who lived in property owned by a trust.

But he said the request for information was similar to that used when a company made a distribution.

"In legal terms a dividend is when a company pays cash out to its shareholders but in tax terms it also includes "any transfer of value" so what we are looking at here is the IRD asking questions that are similar to when a company gives a shareholder a benefit.

"Currently that benefit is taxed if a company gives it to that person. But not taxed if a trust gives it to a beneficiary."

Spencer Smith, tax director at Baker Tilly Staples Rodway. Photo / File

Smith said collecting this information could lead to policy changes where the transfer of value in trusts is also taxed which could mean if a beneficiary is on the 39 per cent tax rate they have to pay a tax top-up as trusts are only taxed at 33 per cent.

Revenue Minister David Parker has made it clear that his view is that the wealthiest New Zealanders are not paying their fair share of tax.

But has denied the Government is planning new taxes on wealth and capital.

Smith said tax data on trusts would be collected over the next year which would allow new policies to be formed post the 2023 election if the Labour Government was re-elected.

He has urged his trust clients to consider transferring any assets now if they're concerned about a future tax.

But Smith said for those who wanted to protect their family home from being sold due to a business collapse there wasn't much they could do about it.

"If you have got your home in trust you are doing it for a reason - you are not going to stop doing it, it is just possible that it might somehow become a taxable benefit to people which is annoying because they are not doing it for tax purposes they are doing it for the security of their home. And they are not going to stop doing that but now they are going to possibly be faced with tax cash cost."

For others the changes could see more people questioning the need for a trust and decide to close it down.

"There is very little people can do about it other than decide not to have a trust. It's a combination of what is happening with the Trust Act and what is happening with trust disclosure.

"The potential for tax changes that will affect trusts are all driving people who previously had trusts and didn't know why to question what are we doing, why do we need it? It is costing us more to run it, we might end up with a tax bill and if they can't see any real purpose for having it then it may be time to shut it down."