Chapter 1 – Introduction and summary
1.1 The Government Inquiry into Foreign Trust Disclosure Rules recommended, amongst other things, that foreign trusts that have a New Zealand-resident trustee should have to file an annual return with Inland Revenue, which includes the trust’s financial statements. The Government adopted the Inquiry’s recommendations and the resultant amendments have recently been enacted.
1.2 These amendments require on-going disclosures by resident foreign trustees, including the requirement to file, as part of an annual return for the foreign trust, financial statements of the trust if the trustee prepares them, or is required to prepare them.
1.3 This paper proposes that resident foreign trustees of foreign trusts be required to prepare financial statements for the trust and specifies the suggested minimum requirements for those financial statements. The purpose of this paper is to consult on these minimum requirements.
1.4 “Foreign trusts” are defined in section HC 11 of the Income Tax Act 2007. The term “foreign trusts” as used in this paper is limited to foreign trusts that have a New Zealand-resident trustee (a “resident foreign trustee” as defined in the Tax Administration Act 1994 (the TAA) at section 3).
Tax Administration Act
1.5 The TAA was recently amended (by the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017) to increase the disclosure rules for foreign trusts as recommended by the Inquiry.
1.6 New section 59D of the TAA requires that resident foreign trustees must file an annual return for the foreign trust that must include a set of financial statements if they are prepared or required to be prepared, and provide details on the foreign trust’s settlements and beneficiary distributions. For further information on this section’s requirements refer to the Appendix.
1.7 It is expected that the Government would enable the requirement for resident foreign trustees of foreign trusts to prepare financial statements for the trust by Order in Council (OIC) using the generic provisions of the TAA at sections 21B and 21C. The OIC would specify a minimum level of required detail for the financial statements.
The proposals in summary
1.8 For periods commencing 1 April 2017 and later, all resident foreign trustees that have an obligation to file an annual return in 2018 and subsequent years should have financial statements prepared to at least the specified minimum requirements. There will be an exception to this where the trust has a statutory obligation to prepare financial statements.
1.9 We suggest that the minimum requirements for these financial statements would be relatively straightforward historical cost, accrual-based financial statements that would constitute special-purpose financial statements.
1.10 Notes to the financial statements or separate schedules would include a statement of accounting policies and detailed reconciliations of settlors’ and beneficiaries’ current accounts.
1.11 We propose that the financial statements will require that all accounts with settlors and beneficiaries be reconciled for movements through the reporting period. This is in addition to the specific disclosure requirements about settlements and distributions to beneficiaries that are required under the new section 59D of the TAA (refer to the Appendix for the detail of this).
1.12 Requirements would be principles-based, although some detail would be required. This is because it is inappropriate for Inland Revenue to attempt to set the format of financial statements or tell accountants the specific detail of what should be in financial statements. Rather, it is envisaged that Inland Revenue would set the principles and the foreign trust specific detail and then rely on the judgement of the person preparing the financial statements for the general accounting detail. The proposed detail about the level of reporting and associated disclosures is contained in Chapter 2.
1.13 A higher standard may be adopted (or required by other law) in which case, so long as the required disclosures are incorporated, these minimum requirements are superseded.
How to make a submission
1.14 Submissions are invited on the level of detail that is suggested for the financial statements. While anyone may submit on it, this paper has been provided to interested parties as determined by all those who made a submission to the Finance and Expenditure Committee on the recent amendments to the Tax Administration Act 1994 concerning foreign trusts.
1.15 Submissions on this paper should be made by 29 June 2017 and can be sent to: [email protected] with “Financial reporting for foreign trusts” in the subject line.
Alternatively they can be sent to:
Financial reporting for foreign trusts
C/- Deputy Commissioner
Policy and Strategy
P O Box 2198
1.16 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.