New Zealand has the highest number of trust account structures per capita globally. To put this in perspective, Trust account regulations NZ show that the country has one trust for every 10-15 people.
The Trusts Act 2019 changed how trusts operate in New Zealand at the time it took effect in January 2021. The IRD released new rules that increase the disclosure requirements for New Zealand taxable trusts. These rules help monitor trusts and their financial positions better. The rules we implemented mainly affect income-earning trusts. All but one of these requirements don’t apply to non-active complying trusts that generate no income.
Let’s look at what trustees need to know about getting audited under current New Zealand law. We’ll cover the required documentation and ways to comply with the improved reporting requirements for your trust.
Legal Framework for Trust Audits in New Zealand
New Zealand’s legal framework for trust audits has several interconnected legislative components. These laws determine audit requirements for trustees and specify required financial disclosures.
Trusts Act 2019 and Tax Administration Act 1994 Overview
The Trusts Act 2019 took effect on January 30, 2021. This marked the first major update to trust law in more than 60 years. The Act doesn’t directly require audits but sets vital record-keeping requirements that are the foundations for audit requirements.
Trustees must keep “core trust documents” under this Act. These documents include the trust deed, variations, property records showing assets and liabilities, trustee decisions, written contracts, accounting records, and financial statements. Each trustee needs to keep the trust terms and variations personally, though they can let another trustee maintain other documents.
The Tax Administration Act 1994 spells out trust audit disclosure requirements in sections 59BA and 59BAB. Section 59BA requires trustees of income-earning trusts to prepare financial statements. They must also disclose details about settlements, settlers, distributions, beneficiaries, and appointers. These rules laid the groundwork to boost reporting standards.
NZLS Trust Account Regulations and Their Scope
Legal practitioners’ trust accounts follow sections 110-116 of the Lawyers and Conveyancers Act 2006 and its regulations. The New Zealand Law Society (NZLS) Trust Account Guidelines offer a detailed system to handle client money and manage trust accounts in law practices.
Regulation 21 of the Lawyers and Conveyancers Act (Trust Account) Regulations 2008 limits practices from claiming their trust accounts have been audited unless:
- A qualified auditor checked the accounts in the last 12 months
- The relevant society received the auditor’s report
A “qualified auditor” must be a chartered accountant with a public practice certificate. They can’t be partners or employees of the practice within the past 12 months. They also can’t work for another practice or be practitioners themselves.
When Does the IRD Require Audit Disclosures?
The Inland Revenue Department (IRD) rolled out new disclosure rules for domestic trusts effective from April 1, 2022. These rules target trusts that file yearly income tax returns. All but one of these trusts need to follow these rules:
- Trusts with non-active declarations
- Foreign trusts
- Charitable trusts
- Trusts eligible to become Māori Authorities
- Widely-held superannuation funds
Non-exempt trusts must prepare financial statements using double-entry accounting. They need to include extra details about how they value assets and liabilities. Small trusts can use cash-basis accounting instead.
The IRD has the authority to request information from trusts covering past income years, demonstrating the government’s ongoing commitment to monitoring trust structures. This heightened scrutiny follows broader tax policy changes, reflecting efforts to ensure compliance and transparency in the management of trusts.
Audit Triggers for Trustees Under Current Law
New Zealand has specific rules that tell trustees when they need audits. These rules are part of the current trust regulations. Several factors determine how often audits happen and what they cover. These factors include income levels, distributions, and the type of trust.
Annual Income Thresholds and Audit Requirements
Income thresholds are the foundations of trust audit requirements. Most domestic trusts can use a simplification if their assessable income is below NZ$170,561.03 in one income year. Trusts must keep their deductible expenses and total assets below certain limits to qualify for simpler reporting; exceeding these thresholds triggers more detailed audits and reporting requirements. Charitable trusts follow different rules: those with moderate annual spending require a qualified auditor to review or audit their accounts, while charities with higher expenditures must undergo a full audit. Inland Revenue data shows that a significant portion of trusts have very low taxable income, and regulators use this information to guide policy adjustments and focus compliance efforts.
Distributions to Beneficiaries Triggering Audit
Trustees now need extensive records for distributions, which might lead to an audit. They must record each beneficiary’s name, birth date, tax residence jurisdiction, and IRD number. The nature of each distribution needs documentation too.
Starting in the 2025 tax year, non-cash distributions below a certain market value threshold will no longer require disclosure. But if the total goes over this amount, trustees must report all distributions. Trustees need clear records to show when income moves from the trust to the beneficiary. Section HC 6(1B) of the Income Tax Act 2007 gives trustees options to allocate beneficiary income. They can do this within six months after the balance date, by the return filing date, or by the trust’s final filing deadline.
Settlements and Power of Appointment Disclosures
Since the 2022 tax year, trustees must file form IR 6S for each person who makes settlements on the trust. This form needs details about all settlements, plus the settler’s name, birth date, and tax ID.
Form IR 6P requires information about anyone who has power over the trust deed. This includes people who can change trustees, modify the beneficiary list, or update the trust deed. The IRD received these details from 52,000 trusts for the first time in 2022.
Exemptions for Non-Active or Low-Income Trusts
Some trusts are exempt from strict audit requirements. Non-active trusts without income are not required to file returns or disclosures, and trusts with minimal interest income can qualify for an exemption if they submit a non-active trust declaration. Prior to 2022, trusts were considered non-active only if their interest income was very low and they had no deductions. The rules now give more exemptions to testamentary trusts created by wills.
Other exempt categories include:
- Foreign trusts
- Charitable trusts
- Māori authority trusts
- Widely-held superannuation funds
- Employee share schemes
Trustees must still fulfill their fiduciary duties and keep proper accounts, even if their trust doesn’t need tax filing.
Required Financial Statements and Documentation
New Zealand trustees must follow detailed documentation guidelines to prepare financial statements for their trusts. The Tax Administration Order 2022 provides these requirements to standardize trust financial reporting.
Statement of Profit or Loss and Financial Position
Tax-filing trusts need to prepare financial statements with two main components. The statement of profit or loss must show the trust’s income and expenses during the income year. A statement of financial position details the trust’s assets, liabilities, and net assets at year-end. These statements should include previous year’s figures if trustees have access to that information.
Double-Entry Accounting and Valuation Methods
Trustees must use the double-entry method to record financial transactions. They need to apply accrual accounting principles instead of cash accounting. The trustees can choose from three methods to value assets and liabilities: historical cost with appropriate impairment or depreciation, tax value (limited to income-producing assets), or market value, which might include recent rating valuations. Land, buildings, and ownership interests require clear disclosure of valuation methods.
Settling Between Profit and Taxable Income
A vital part of trust reporting involves settling profit or loss figures in the statement with the trustee’s taxable income for the year. This process explains differences between accounting profit and taxable income through additions like non-deductible expenses and subtractions such as non-assessable income. The trust’s accounting profit before tax plus adjustments matches the total trust income.
Schedule of Fixed Assets
The trust’s fixed assets and depreciable property need a detailed, tax-based schedule. Trustees must value land and buildings separately, and they can use recent rating valuations for this purpose. Assets acquired under section GC 20’s purchase price allocation rules need consistent valuation methods in the first year and beyond. Forestry businesses must include timber cost information, while livestock owners need to detail their valuation methods.
FAQs
Q1. Are all trusts in New Zealand required to be audited?
Not all trusts in New Zealand are required to be audited. The audit requirements depend on factors such as the trust’s income, assets, and type. For instance, trusts with annual assessable income and deductible expenses below NZ$170,561.03 and total assets under NZ$8.53 million may qualify for simplified reporting.
Q2. What are the main triggers for trust audits in New Zealand?
The main triggers for trust audits in New Zealand include exceeding certain income thresholds, making distributions to beneficiaries, receiving settlements, and changes in power of appointment. Non-active trusts and those with low income may be exempt from many audit requirements.
Q3. What financial statements are required for trust audits in New Zealand?
Trusts required to file tax returns must prepare financial statements that include a statement of profit or loss, a statement of financial position, a reconciliation between profit and taxable income, and a schedule of fixed assets. These statements must be prepared using double-entry accounting methods.
About the Author: Jonathan Maharaj
