Why even non-active trusts should prepare financial statements 2023
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Articles by Anna Loginova.
As you are probably already aware, trusts now have more reporting requirements with the IRD. However, in some circumstances, trusts, especially family trusts, may have been made non-active with the IRD, which means there is no income to report (and no tax to pay).
Although a trust may not generate any income, and therefore may not be required to file an income tax return, it is still important to prepare financial statements for several reasons.
- It is a mandatory trustee duty to retain the documents related to the trust, including records of trust property that identify assets and liabilities.
- Beneficiaries have the right to know the financial position and financial performance of the trust, which provides transparency and accountability.
- It allows the trustees to keep track of payments made on behalf of the beneficiaries (e.g. school fees).
- The professional trustee of the trust can review the financial statements to ensure that the trust is being run properly and that they are meeting their professional trustee obligations.
- Preparation of financial statements provides an opportunity to ensure that deeds of acknowledgement of debt and gifting, and any other relevant documents, are prepared, where appropriate.
- It could be beneficial from a relationship property perspective in terms of setting a baseline for a client’s asset base prior to a relationship.
- A trust that receives no more than $1,000 in passive interest or dividend income that has been subject to withholding tax at source, can be declared “non-active” and exempt from filing an income tax return. Again, even if exempt from the requirement for filing a tax return, preparation of financial statements to properly account for the income is prudent. If the passive interest / dividend income exceeds the $1,000 “non-active” threshold, a tax return needs to be filed with the IRD, and so the trust needs to be activated.
- Preparation of financial statements is an effective means of record keeping, which is an important aspect of good governance and can assist trustees to manage the assets of the trust.
- All major transactions are reflected in the financial statements, e.g. the purchase or sale of a new house, changes in trustees etc.
While not compulsory if a trust does not earn income, or has passive income below the $1,000 threshold, for the reasons outlined above, we consider it best practice for all trusts to prepare financial statements.
Please contact GRA if you would like to know more about completing financial statements for your trust, and we will be happy to provide you with a quote.
Anna Loginova
Partner
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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This letter is to express my appreciation for the assistance and encouragement of both Anthony Lipscombe and particularly John Heaslip over the last financial year. The period since activating my trading trust has been one of considerable stress, as well as personal development, as I embarked on this as a relative business neophyte with virtually no awareness of the contemporary requirements of running a business, particularly the financial records aspect. During much of this period I have therefore felt considerable out of my depth. However I have been lucky enough to have had the benefit of the advice and support of John Heaslip in rationalizing what was a fairly chaotic set of records of the first year property trading. I am able to say that John in particular, has been unstinting in his attention to my needs and has done so in a manner which has never alluded to my extremely rudimentary grasp of managing a business, or even of being unable to set out a spread sheet properly. The result of the above guidance is that now, although my trading trust would still not be able to operate without the advice of GRA, I do least feel a sense of satisfaction that I have got to my present point without major disaster and that my property trust does now have some kind of firmer basis for any future activities - Name withheld by request
Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
We help new, small and medium property investors become long-term successful investors through our education programmes and property portfolio planning advice. With our deep knowledge and experience, we have assisted hundreds of clients build wealth through property investment.
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