By Lee Harris - 27 May 2022
Information that must now be provided alongside annual trust tax
returns will come as an unpleasant surprise for many trustees and
beneficiaries. There is no doubt that Inland Revenue is taking a
close look at trusts to evaluate how they are being used, and to
decide whether the use should be subject to tax.
It is not uncommon for trust assets to be enjoyed cost-free by
trust beneficiaries. For example, the bach is rented out to cover
costs, such as via AirBnb, and it is also used rent free by trust
beneficiaries.
The example of the trust-held bach is particularly alarming.
Short term rental is a commercial activity, so when gross rental
income reaches the $60,000 threshold, GST is triggered.
One of the new details that needs to be disclosed annually is
the market value for beneficiaries' enjoyment of trust assets.
Inland Revenue intends to combine this market value to the short
term rental income to determine whether the $60,000 threshhold has
been reached.
If it has, the bach would be subject to GST on a sale or a
disposal, and the total value of the accommodation supply provided
is subject to GST. This includes the rent-free value provided to
beneficiaries.
Example 7 in Interpretation Statement IS 20/04 provides a
specific example of Inland Revenue's current view:
Example 7 - supplies to
associated persons
The Smith and Jones Family Trust
owns a large modern holiday home in the South Island. The holiday
home is advertised on a website for $600 a night. The holiday home
is rented out for most of January and is also popular in ski
season. In total, it is rented out for 80 nights a year. The total
income from taxable supplies is $48,000. Based on these supplies
alone, the trustees would not have to register for GST.
However, during the year, some
family members use the holiday home. On each occasion, the family
members are beneficiaries or relatives of beneficiaries, so are
"associated persons". They stay for a week at Christmas and a week
in the school holidays. Family members also stay on occasional
weekends when there are no other bookings. In total, family members
stay 28 nights a year for which they do not pay rent to the
trustees. The open market value of the supplies to associated
persons is 28 x $600 = $16,800. The total value of taxable supplies
is $64,800 and the trust must register for GST under s 51 and any
supplies of accommodation will be subject to GST.
(
https://www.taxtechnical.ird.govt.nz/-/media/project/ir/tt/pdfs/interpretation-statements/is-20-04.pdf)
My next blog will cover other situations that will be affected
by the new information requirements for trusts. This includes wills
with life interests and implications for beneficiaries, trustees or
settlors who are now living overseas or who have foreign
obligations.
Contacts
Melissa
Clark
Lee
Harris