From the 1st April 2024, the trust tax rate has increased from a flat rate of 33%, to a flat rate of 39%.This is on any income retained in the trust and not distributed to beneficiaries.​

The post The Trust Tax Rate Has Increased to 39% From 1st April 2024 appeared first on GECA Chartered Accountants.

The recent Budget 2023 announcement of an increase in the trustee tax rate from 33% to 39% starting from 1st April 2024 has raised concerns among the many New Zealanders who have a family trust.

There are approximately 400,000 family trusts registered in the country and although Budget Press Release attempts to downplay the impact on most trusts, emphasizing that only a small proportion of trusts will bear the brunt of the additional tax burden, this development could impact any trusts that derive an income.

The Trustee Tax Increase:

The decision to raise the trustee tax rate was driven by the Government’s efforts to address concerns about high-income earners using trusts to circumvent tax obligations. The increase in the trustee tax rate to 39% aligns the top personal income rate to the trust rate, removing an incentive to keep income in the trust when an individual’s personal income exceeds $180k p.a.

According to the data, the top five percent of trusts with taxable income in the 2021 tax year accounted for 78% of all trustee income, raising approximately $350 million per year. Unfortunately, this reassurance offers little comfort to the significant number of trusts owned by ‘regular New Zealanders’ with a marginal tax rate of 33% or lower.

Original IRD guidance issued at the time suggested trustees could distribute annual income to beneficiaries to access lower tax rates who could then resettle these funds back to the trust. However, this guidance has subsequently been withdrawn, as it may contravene rules around tax evasion.

The proposed minor exemptions for deceased estates and trusts for disabled persons may provide some relief, but it remains to be seen how effective they will be.

Conclusion:

If passed into law, the increase in the trustee tax rate has significant implications for trustees managing family trusts in New Zealand. We will update you if, and when this becomes law.

Get in touch today!

The post New Zealand’s Family Trusts Face Tax Hike in Budget 2023 appeared first on GECA Chartered Accountants.

The Trusts Act 2019 was passed on 30 July 2019 replaces the Trust Act 1956.  The new trust law will be effective from 30^th January 2021 and includes clarification of the existing trust laws and some significant changes.

Trustee Obligations and Duties

A lot of our clients have trusts and are also trustees of trusts. However, some of them are not aware of the role and duties of the Trustees, record-keeping and disclosure requirements.

Key Changes

Trustees will no longer be able to keep the trust information from the beneficiaries private, or details of the past and future beneficiary distributions or current account balances owed to the beneficiaries.  The beneficiaries now can request for their current account balances to be repaid to them.

The new reforms now require increased compliance requirements from the Trustees and new disclosures to the beneficiaries.  Some of the various changes introduced are as follows:

The Act outlines which information the Trustees should maintain and for how long. The trustees should be familiar and comply with the record-keeping requirements.

Important Duty, Obligation and Term Changes:

Default Duties – Settlors and trustees should review and consider whether any of the following duties should be amended or excluded by the Trust

• General duty of care
• Duty to invest prudently
• Not to exercise power for their own benefit
• Consider the exercise of power
• Not to bind or commit trustees to future exercise of discretion
• Avoid conflict of interest
• Duty of being impartial
• Duty not to profit
• Act for no reward
• Act unanimously

Mandatory Duties – Trustees should be aware of the following duties which cannot be amended:

• Know the terms of the trust
• Duty to act in accordance with the terms of the trust
• Act in good faith and honestly
• Duty to exercise powers for the proper purpose
• Duty to act for the benefit of beneficiaries or to further the permitted purpose of the trust

Obligation to Beneficiaries – The act outlines what information trustees should provide to the beneficiaries or their representatives.  The disclosures include:

• The fact that the individual is a beneficiary of the trust
• Provide names and contact details of trustees
• Keep the beneficiaries updated with details of any trustee appointment, retirement and removal of trustees as it occurs.
• Provide terms of the trust or trust information if requested by the beneficiary.

Trust Period – the new reforms have now revoked the trust period of 80 years and increased it to 125 years.

In Conclusion

Although, there is increased level of disclosure and trustee obligations, the trusts are still a valid structure to use for asset protection and investment structure.

At GECA we also act as a Professional Trustee for some of our clients and we would like to assist our clients who are also trustees of their trusts.  We suggest contacting us as a starting point to do a thorough review of your trust deed and assisting you with the new trust requirements.

The post The new Trust Act and how it impacts you appeared first on GECA Chartered Accountants.

After you buy your first home and accumulate some equity on the property, it may be time for you to climb up the property ladder further. Now, when you are ready to start investing it is extremely important to do it right from the beginning. And the first question that needs to be asked is what legal structure to choose and what tax consequences it will bring.

Recently, The Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 has been enacted. It introduced ring-fencing rental losses, a new rule for New Zealand residential property investors that will apply from the beginning of the 2020 financial year, i.e. from 1 April 2019.

To keep it simple here is what it means for property investors:

• If expenses related to your rental are higher than your rental income you cannot reduce your other income by the amount of your rental loss.
• You can use that loss amount against the profit from your rental – in a tax year when it gets profitable. Before this happens, ring-fenced losses can be accumulated.
• The amount of ring-fenced losses can be used to reduce or offset against taxable gain on sale of property for example if a rental is bought on or after 29 March 2018 and sold within five years after the purchase (so called the bright-line test). Un-utilised ring-fenced losses can be used in future when an investor buys another rental.
• An investor can elect to apply the rules on a property-by-property basis or on portfolio basis. This means that if an investor has got more than one rental, they can choose to track their ring-fencing losses by property or by the whole portfolio. Also, there is an option for an investor to include some of the properties to the portfolio and keep the others separate.
• Ring-fencing losses rules do not apply to your main home, business premises, commercial property, farmland, mixed used assets, employee accommodation, property bought as part of a land dealing business or bought with the intention of resale

This is the minimum that every investor may want to know about the new legislation. Now let me come back to the main question: what structure will suit better a new investor in the changed tax environment?

1. The first and simplest structure to be used is to buy a rental under a natural person’s name.If you get profit from your rental it is going to be taxed at your marginal rate. If you get a loss then the new rules will apply and you can offset the loss against your future profit.

The biggest disadvantage of this business structure is that even though it looks like a cheap option in reality it may appear that it is the most expensive one. Rental property under your personal name is not separated from your other assets.  This means that has no protection against your creditors and relationship property claims. Also, under some circumstances the process of inheriting this property may get complicated.

2. Another option is to set up a trust and transfer your residential property to this trust. It can by a costly and time-consuming option since proper trust setting and running implies that you will need to work closely with your financial adviser, lawyer and an accountant. However, it may be worth it: your property will be kept secured and protected against claims by creditors and ex-spouses / partners. Assets kept in trusts will be inherited by the people you want, and not the people that persuade the court that they were disadvantaged.

Taxwise, if the trust makes a profit out of rental property it may keep that profit in the trust or distribute it to the beneficiaries. If the profit is kept in trust it should be taxed at the flat rate of 33%. If it is distributed to the beneficiaries, it will be taxed at the beneficiaries’ marginal rates except for children under 16 (for them, the rate of 33% applies).

If the trust makes a loss it is subject to the above-described ring-fencing losses rule. The loss cannot be distributed to the beneficiaries and cannot be offset against other income that the trust may have.

3. There is an option for you to create a limited liability company and transfer your rental to the company. It will help you protect your property better than if it was held by a natural person but not as well as if it was held in a trust. However, the tax consequences will be similar. If profit is held in the company it will be taxed at the flat rate of 28%. If it is distributed to a shareholder as a shareholder salary it will be taxed at their marginal rate. Ring-fencing losses rule will still apply to the company losses.

There is one minor exception from this rule. As per s EL 11 of The Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019, if a company is not a close company, i.e. has got more than six not associated natural persons, the ring-fencing losses rule does not apply. However, the majority of New Zealand companies are close companies and will be still caught by the new rule.

Summary

Nowadays due to the implementation of ring-fencing losses legislation, holding rental properties individually or keeping it in a trust or in a close company will not differ significantly in terms of tax liabilities. Each ownership structure allows distribution of profits to individuals and tax at individuals’ marginal rate. However, the losses will be still subject to the new rules.

Therefore, when choosing a business structure, it is worth considering other pros and cons such as security, compliance costs and accessibility of profit.

The Author.

The article is written by Valiya Gafarova, Certified Xero Adviser and Accountant at GECA Chartered Accountants. If you want to know more about tax consequences of having a rental feel free to get in touch with us on 0800 758 766.

Please note that this blog post should be considered as a general overview but not as a tax advice relevant to your situation.

The post How to choose the right business structure for your residential rentals after ring-fencing losses were introduced appeared first on GECA Chartered Accountants.

I meet many people who are trustees of other people’s trusts. Generally these trusteeships are taken on by well-meaning friends or family who have limited, if any, understanding of the obligations and even more importantly – the trustee liabilities.

Of more concern, many people are unsure if they are trustees. I often hear people say they were a trustee a while ago but unsure of the situation now. If this is you, make enquiries now to ascertain the situation.

If you are still a trustee, consider if the original reasons for doing this are still valid and ensure you understand the responsibilities and obligations of the trustee role.  This is particularly relevant if the trust has taxable activities. Trustees have personal liability for any income tax or GST owed by the trust to the IRD.

Note these trustee liabilities are increasing under proposed new trust legislation. Recently trustee roles are more often being held by Professional Trustees to ensure the trust is administered correctly and is able to fulfil the purpose it was set up for.

What to do if you want to resign?

So you have reviewed your situation and decided you no longer want to be a trustee. First review the terms of the trust deed and confirm trustees can retire at their discretion. Where the deed of trust does not expressly permit retirement the Trustee Act 1956 should be referred to.

Any objections?

As the retirement of a trustee can be expensive (especially where the trust has significant property investments, all of which will have to be transferred from the retiring trustee to the remaining or new trustees) the other trustee(s) may not be agreeable to the retirement.   There might also be opposition to retirement where the trustees have liability concerns.

Where retirement cannot be achieved by agreement, a trustee who wishes to retire can give notice of the intention to retire to any co-trustees and any person with the power of appointment and removal of trustees and pass the trust’s accounts to the Registrar of the High Court or can ask the High Court to appoint a new trustee.  This may seem an extreme response.  However, given that a trustee remains personally liable until the trustee has retired this course or action may be preferable than to remaining liable both jointly with the other trustees and personally.

Provided the retirement is by agreement, a deed of retirement should be prepared and signed by all trustees and witnessed.

Following up

Once the trustee has retired, the trust’s property must be legally transferred to the continuing and/or new trustees.  All the trustees must sign the transfer documents for land and shares and any other property owned by the trustees.

Check that the Companies Office records have been updated to show transfers of shares and ask to see a copy of the certificate of title for any land to show that the trustee is no longer listed as a registered proprietor.

A trustee will remain liable for GST until the IRD has been notified in writing that the person is no longer a trustee. Retirement will not avoid any liability incurred before the trustee’s retirement. Ensure the IRD receive written notification of your resignation as soon as possible.

Any signing authorities with banks or other institution need to be updated.

The retiring trustee should also advise the trust’s beneficiaries, investment adviser, accountant, lawyer and any other party the trust has had dealings with that the trustee has retired.

The best thing to protect yourself as a trustee is to have all your trust accounting and tax matters reviewed to both ensure you are protected and that there is a formal schedule of communication with respect to keeping IRD informed of any changes. Call us at GECA today on 0800 758 766.

The post Your trustee liabilities: are you aware of them? appeared first on GECA Chartered Accountants.

For a start, a trust needs to be correctly administered so it can fulfil its purpose of protecting assets. A trust that is not administered correctly has a high risk runs the risk of being deemed a sham and exposing trust assets to claims against the settlor.

However, the costs of trust administration can be high, particularly where the trust holds income producing assets that require annual accounts and tax filing. These costs needs to be weighed against the benefits a trust can provide.

Trust can provide asset protection against a number of potential risks, which include:

• Claims on personal assets by business creditors
• Relationship property claims
• Possible re-introduction of estate duty

Trust GECA Chartered Accountants with your Family Trust

Trusts allow trust income to be shared amongst beneficiaries (generally family members) including those on lower marginal tax rates.  They also provide a mechanism to safeguard assets for vulnerable children and allows for continuity of asset protection on death of the settlor.

These are all valid and valuable reasons to have a trust. However, the trust must be administered correctly including regular meetings by the trustees and appropriate records maintained such as Minutes of Trust meetings and Resolutions that document decisions made.

Changes to legislation have increased beneficiaries rights and it is important the Trustees understand their obligations under this new regime.

Read more about trusts in some of our previous blogs or visit our website for more:

• Trust Deed Review – Do I need one?
• Does your Professional Trustee know what to do if you are not around?
• Managing your family trust in the cloud

If you are unsure if you still need trust or have concerns about the administration of your trust, then we can help. Call your GECA Adviser now on 0800 758 766 for no obligation assessment of your situation.

The post Food for Thought: Pros and Cons of a Family Trust appeared first on GECA Chartered Accountants.

Most family trusts in New Zealand have settlors acting as trustees. In the event of their death, it is important that trusts have a trustee to administer the trust according to the settlors’s wishes. It is crucial the trustee understands the wishes of the settlors in regards to administering the trust and treatment of the beneficiaries.

A Memorandum of Wishes (sometimes referred to as a ‘Letter of Wishes’) gives you the ability to guide your appointed Trustees on what the purpose and desired outcome for your Trust assets is.

While it may not necessarily be binding on the surviving Trustees, they will usually follow it.  Your wishes may be documented in absolute terms or in relative terms, it may take into account all of the distributions that have been made to date, or take into account only part of them.

A possible format could be:

Introduction: Why you set up the Trust.

Specific Beneficiaries:  Who you want to benefit and when.  Is a charity to be included?

Context:  Consider the current situation of your beneficiaries, i.e.preschoolers, married with children, financially aware or needing support, etc.

What to do: Specify how you want the Trust to work going forward.

Further points to consider:

• Should distributions be absolute?  E.g. $200,000 each.
• Should distributions be in relative terms?  E.g. each child is to receive sufficient upon the death of my spouse and myself to be able to buy a medium priced house in Hamilton.
• Don’t forget that when the Trustees read your Memorandum of Wishes it will be a sad day as you will have passed away.  Choose these people with care, as it is them who will be taking into account your views and wishes later on.
• Give some thought to the age of the Trustees, and/or if you are considering appointing a family member, could it cause a dispute in the family.  Also consider whether they have a good sense of business and share your family values.

When taking on a professional trusteeship role for our clients at GECA, we ensure a Memorandum of Wishes is completed at the initial Trustees Meeting.  As part of this we cover decisions such as:

1. Do you want the Trust assets dispersed immediately on your death or preserved for a purpose?
   1. Should a home be sold or kept for all?
   2. If dispersed is it to be done on a strictly even basis?

2. Factors to consider in assessing what to leave your children:
   1. What are their ages and stages in life?
   2. What is their matrimonial position?
   3. What have you given them to date?
   4. Does one of your children have special needs that should be considered?
   5. What is the financial maturity of each child?
   6. Consider the amount of wealth you have to pass on

3. Are there specific purposes that the funds should be used for?
   1. Education aspirations
   2. Travel
   3. Repay student loans

If you need help drafting a Memorandum of Wishes or would like the peace of mind that comes with knowing you have a trust that will protect your assets and look after your beneficiaries when you aren’t around, then we can help.

Call Giles now for a no obligation discussion on the set up and administration of your trust on 0800 758 766.

The post Does your professional trustee know what to do if you aren’t around? appeared first on GECA Chartered Accountants.

From 1 October 2015, anyone buying or selling property will need an IRD number. This includes non-income generating family trusts that own the main family home. Resident IRD applications must be posted to the IRD and the IRD has advised an 8 – 10 day processing time. However, the processing time may well increase as the volume of applications grow?

Therefore anyone considering buying or selling a property through a trust is advised to apply for an IRD number well in advance of the transaction taking place. If the IRD number is not available at the time of settlement, interest and penalties could be imposed under the sale and purchase agreement.

Non-residents who own property in New Zealand will also be required to have an IRD number. Whilst a non-resident application can be emailed to the IRD, there is a further requirement to have a New Zealand bank account included in the application and the time taken to open an account and satisfy anti-money laundering requirements can take several weeks.

We therefore strongly advise trustees of family trusts and non-resident property owners whom are considering a property purchase or sale to apply for an IRD number after 1 October 2015.

Please call your GECA adviser on 0800 758 766 if you would like us to file an IRD number application on your behalf or if you would like further advice in regard to your personal circumstances.

The post Does your Family Trust have an IRD number? appeared first on GECA Chartered Accountants.

Problems include a lack of clear decision-making process by all trustees, poor record-keeping around decisions and the retention of documentation, mixing financial arrangement of individuals with those of the trust and more. As professional trustees for many family trusts, at GECA we recognise the importance of correctly administering a trust to ensure it is compliant with trust legislation and correctly reflects the intentions of the settlors.

To do this, we use an online trust management platform called Trustworks which allows efficient and cost effective compliance and management of trusts we are involved with.
The software brings all the parties involved in the trust and all information together within an online portal. This means that communication and information is shared by all trustees, plus the trust’s accountant, lawyer, or professional manager. It also allows other parties, such as a financial advisor to access the trust’s information if you wish.
Mandatory Trust administration requirements such as creating discussions and resolutions around trust decisions can be undertaken and shared in seconds using built-in templates. Trustees can then approve and sign resolutions and documents online. And of course, all trust records can be found easily by all parties.
And as you would expect the records are stored in multiple locations overseas with both top-levels of security and encryption. So in the event of a natural disaster or other event all the trusts records are still held securely. Much more secure than that dusty trust file kept in your bottom drawer.
Conducting a regular GECA Trust Review and using GECA’s professional trustee services will ensure your trust is compliant and meets your intentions.

To find out more about GECA’s Professional Trustee services, call Giles now on 0800 758 766 or email him.

The post Managing your family trust in the cloud appeared first on GECA Chartered Accountants.

Given the proposed changes in legislation in regard administering trusts, we recommend all our clients with trusts have a regular GECA trust review. This ensures the Trust is delivering the required outcomes and is being administered correctly.

To find out more about GECA’s Trust Review service click here or call Giles now on 0800 758 766.

The post Trust Deed Review – do I need one? appeared first on GECA Chartered Accountants.