Trusts play a significant role in managing wealth, protecting assets, and ensuring succession planning in New Zealand. However, with increased scrutiny from Inland Revenue (IRD) under evolving tax regulations, not all trusts are subject to the same compliance obligations. Understanding what trusts are exempt from certain IRD requirements can save time, resources, and reduce administrative burdens.

Key IRD compliance obligations for trusts in New Zealand

Most trusts in New Zealand are required to meet several tax-related obligations, including:

• Filing tax returns: Trustees must file annual income tax returns, even if no income has been earned.
• Record keeping: Trusts must maintain accurate financial records, including details of income, expenses, assets, and liabilities.
• Disclosure requirements: Trustees are often required to provide detailed information about the trust’s activities, settlors, and beneficiaries.

However, certain trusts are exempt from some or all of these IRD compliance requirements.

Trusts exempt from full IRD compliance

The following types of trusts may be exempt from full IRD compliance obligations:

Charitable trusts

Charitable trusts registered with Charities Services are generally exempt from income tax if they operate exclusively for charitable purposes. Key exemptions include:

• Tax returns: Charitable trusts with full tax exemption are not required to file income tax returns, provided their income is applied to charitable purposes.
• GST registration: Charitable trusts are exempt from GST on certain activities if they meet specific criteria.

Non-active trusts

Non-active trusts are those that do not generate income, do not incur expenses exceeding a nominal threshold ($200), and do not hold investments or operate in a way that produces taxable income. These trusts can:

• File a declaration of non-activity with the IRD.
• Be exempt from filing annual income tax returns, provided they maintain their non-active status.

To qualify as a non-active trust, the following criteria generally apply:

• The trust does not derive income during the year.
• The trust does not incur deductible expenses exceeding $200.
• The trust does not engage in transactions with others that give rise to income for them.
• The trust’s activities are limited to holding non-income-generating assets (e.g., a family home) or maintaining bank accounts with minimal interest income.

Non-active trusts must notify the IRD of their status and ensure they meet these conditions annually. A change in the trust’s financial activities could revoke its non-active status, triggering compliance obligations.

Foreign trusts with no New Zealand tax obligations

Foreign trusts with non-resident settlors and no New Zealand-sourced income are generally exempt from filing income tax returns in New Zealand. However, these trusts must:

• Register with the IRD if they have connections to New Zealand.
• Comply with reporting obligations if required by the IRD.

Family trusts with minimal taxable activities

Family trusts that generate minimal or no taxable income (e.g., those holding a family home or non-income-generating assets) may have reduced compliance obligations. These trusts may:

• File simplified tax returns.
• Be exempt from detailed financial reporting requirements.

Considerations for IRD compliance

While certain trusts are exempt from full IRD compliance, trustees must ensure:

• Accurate declarations: Trustees should file appropriate declarations with the IRD, such as non-active trust status, to confirm their exemption.
• Ongoing monitoring: A change in the trust’s income or activities may trigger compliance obligations.
• Professional advice: Engage with tax professionals to ensure that the trust’s status is correctly assessed and reported to the IRD.

Conclusion

Understanding IRD compliance obligations for trusts in New Zealand is essential for trustees to fulfill their tax responsibilities while avoiding unnecessary administrative burdens. Whether your trust is a charitable trust, non-active trust, or operates with minimal taxable activities, knowing where IRD exemptions apply can simplify trust management. However, due to the complexities of tax law, it is recommended you seek advice from a tax specialist to ensure compliance and optimise the benefits of your trust structure.