TRUST ME, THE IRD WANTS INFORMATION - Finding the right topic for the tax blog each week can be a tricky exercise. For example, this week the IRD released draft determination ED0234 on the amortisation rates for landfill cell construction expenditure. Much as I know you, my most discerning reader, would love to hear my insights on landfill cell construction, it’s not what I’m going to talk to you about today.

Kiwis love trusts, so much so that there are up to 500,000 of them established in this country.

Unlike individuals, trusts pay a flat rate of tax, currently 33%. This was fine when individuals paid no more than 33% on their income, but now that the top marginal tax rate is 39%, suddenly there’s an incentive to funnel income into trusts instead of it being taxed at the individual level.

To allow the IRD to better monitor how trusts are used, earlier in the year amendments were made to the Income Tax Act 2007 to require trusts to report more information to the IRD, including details on beneficiaries, settlements on the trust, and financial information on the trust’s activities.

We’ve talked about this before, but since I know you’ve got a lot on your mind I wanted to firstly remind you this is happening (so you don’t get upset with your poor accountant when they ask for all this new information), but also to talk about the IRD’s draft determination, which fleshes out how the IRD intends to apply the new rules. And it’s … interesting.

From a taxation point of view, IRD shouldn’t care less how you present your financial statements to the world. That’s between you and the XRB. They should just be interested in making sure you pay the right amount of tax, which is determined by tax law, not accounting standards.

And yet, the IRD are asking for such things as accounting standards and policies used by trusts and a reconciliation from financial statements to taxable income. They’re also requiring dividends to be shown grossed up for imputation credits – even the accounting standards allow you to choose between showing dividends gross or net of imputation.

The good news is some of trusts won’t have to worry about this. The IRD are proposing a de minimis threshold to exclude small trusts. Its proposed trusts won’t have to comply with the new disclosure requirements if they have less than $30,000 of income, less than $30,000 of expenditure in an income year, and held less than $2m of assets in that income year.

Trusts that don’t fall under these thresholds will have to provide the IRD with information that, strictly speaking, doesn’t seem relevant to tax administration. It’s just a draft determination at this stage, though, so watch this space.