Wellington Lawyers: Navigating Trusts: New Obligations and Risks Unveiled

WELLINGTON, New Zealand - Nov. 14, 2023 - PRLog -- Over the past three years, the trusts landscape has undergone significant transformations, challenging the conventional practices in place for over half a century. Trustees now contend with elevated duties towards beneficiaries and heightened legal compliance obligations. The catalysts for these changes are the Trusts Act 2019 (Trusts Act) and the Taxation (Income Tax Rate and Other Amendments) Act 2020 (Tax Amendment Act). This article explores the implications of both acts on trusts and their trustees.

Trusts Act 2019

In essence, the Trusts Act introduces new mandatory and default duties for trustees. These duties, applicable unless modified or excluded by trust terms, aim to enhance trustee accountability. Additionally, the Trusts Act mandates trustees to disclose essential trust information to beneficiaries. For an in-depth analysis, refer to our previous blogs on the Trusts Act [Link to Blogs].

Taxation (Income Tax Rate and Other Amendments) Act 2020

A pivotal tax policy introduced by the New Zealand Labour Party in the 2020 general election was the creation of a new personal tax rate of 39% on income exceeding $180,000. Effective from April 1, 2021, this rate was anticipated to impact around 2% of New Zealanders. Enacted through the Tax Amendment Act, this legislation aimed to address concerns that individuals could circumvent higher personal tax rates by channeling income through trusts.

The Tax Amendment Act responds to this critique by imposing comprehensive financial disclosure obligations on domestic trusts. In effect since April 1, 2021, with retrospective powers extending back to 2015 if concerns arise, the new regime targets trusts with annual incomes exceeding $200. Charitable trusts, Māori Authority trusts, foreign trusts, and declared non-active trusts are exempt from these requirements.

Financial disclosures encompass profit/loss statements, balance sheets, details of asset transfers, and other specified information. The regime also demands information on distributions, settlors, appointors, and their respective details. The Inland Revenue Department (IRD) utilizes these measures to scrutinize trusts potentially utilized to evade the correct personal tax rate.

Implications for Trustees

The dual impact of these legislative changes means trustees face heightened scrutiny from various quarters – IRD, beneficiaries, and the broader government. Trustees must navigate additional steps to fulfill their legal duties, leading to increased compliance requirements and associated risks.

For standard family trusts centered around a family home, exemptions from certain tax scrutinies may apply (seek professional advice for specific situations). However, trusts with intricate structures or those owning multiple properties must meticulously adhere to tax obligations and trust administration requirements.

At Corelegal Lawyers, we bring extensive experience in trust law and administration, guiding trustees through potential pitfalls. Regularly reviewing trust affairs, particularly in light of these evolving obligations, is essential. Our team helps you assess the trust's value and purpose, ensuring compliance with the latest legal requirements. https://www.corelegal.co.nz