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The Government’s distrust of family trusts



by Andrew Bayly


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Family trusts are used to protect and manage assets, such as the family home, for the future, but the new rules for the disclosure of information are set to increase compliance costs dramatically. Photo pexels.


Since the Labour Government came into power, the Minister of Revenue, David Parker, has been on a mission to tackle wealth and income inequality in New Zealand. Whilst many social democrats in the Labour Party and the Greens might cheer on the Minister for pushing initiatives that sound good – such as introducing a higher marginal personal income tax rate, disclosure on trusts, and changes to interest deductibility rules – I’d like to remind you about the law of unintended consequences.

In the midst of the cost-of-living crisis, an efficient, broad-based and proportional tax system is necessary. However, we should not be adding excess burden on hardworking families and business owners.

Instead, what the Government has done is substantially increase compliance costs, worsen economic outcomes and unintentionally harm those they are intending to protect.

For example, on the issue of trusts in the Taxation (Income Tax Rate and Other Amendments) Act that passed into law in December 2020, Inland Revenue has since set out to obtain a huge amount of information from trusts across the country on the basis of trust disclosure of information. This will force all trustees to hire an accountant to collect the information, regardless of the size of the trust. Trustees will need to collect all the personal tax details of all trustees, settlors and beneficiaries of a trust (which for most family trusts could include generations of family members). Full details of any benefits provided to beneficiaries will need to be disclosed to Inland Revenue unless they are ‘minor or incidental’ (something that Inland Revenue has unhelpfully left undefined and without guidance).

This means that every time a trust beneficiary (such as a child) uses a holiday home, or a car, or any other non-cash asset held in a trust, the trustee must have a record of this interaction and disclose it to Inland Revenue. For what reason? There is no clear explanation as to why Inland Revenue needs such an intrusive level of information. Likewise, trustees will need to disclose any new settlements on a trust, with Inland Revenue not ruling out that a family member mowing the lawns at the trust-owned family home without compensation could be deemed a settlement.

These rules are madness.

As many accountants and tax experts have suggested to me, on average it is going to cost around $1,000, if not more – possibly up to $5,000 – to meet these increased disclosure requirements. With 245,000 estimated trusts in the country, this could potentially generate between $245 million and a whopping $1.2 billion in compliance costs. In October 2021, Inland Revenue announced that for the 2021-22 tax year, trustees would need to provide additional information with their income tax returns. However, Inland Revenue has not explained why it is requesting this information, or what benefit there is to the tax system (it doesn’t seem unreasonable to expect that this data could be used to introduce new taxes or cut social assistance to someone living in a trust-owned home). This adds further burden to regular middle-income people that started trusts for their families and to protect assets when running a business.

What’s even worse is that the Minister claims that, based on his own experience, the compliance costs to these tax changes are virtually nil. Earlier this month, I challenged Minister Parker at the Finance and Expenditure Select Committee on the issue of trusts and the increased compliance costs. He claimed that he “doesn’t accept the number” because his own trust had zero compliance costs. His rationale is wrong, and some accountants I’ve talked to think he may not have completed his disclosures correctly if he thought they didn’t add any compliance costs! Without understanding the consequences, the Minister is pursuing policies that will bring greater financial difficulties for families that are trying to build their businesses and their communities.

On a similar line, two months ago the Minister announced that he will be introducing a bill called ‘The Tax Principles Act’ sometime later this year which would set out the principles of a fair tax system.

Of course, having a fair and efficient tax system is important. It is only fair that those who earn more pay more, and National agrees with that principle. But Parker’s views on ‘fairness’ are debatable and views on tax are divergent across the political spectrum.

It’s an empirical fact that wealthy New Zealanders pay a substantial amount of personal income tax. According to Stats NZ, the top 9 per cent of income earners pay a whopping 42 per cent of the total personal income tax. The top 2 per cent of taxpayers are already paying about 20 per cent of the total.

We also distribute money to those that need social insurance through programmes such as Working for Families and accommodation supplements. More than half of all households with children receive more in welfare payments and tax credits than they pay in tax. Single-income families with two children don’t pay a dollar of net income tax until their income exceeds $60,000. In my eyes, the Minister’s agenda is all about further redistribution – taking money from not only the wealthy, but many middle New Zealanders too, to give to the poor. Parker’s hero is renowned French economist Thomas Piketty – and he’s very public about this fact. This is an economist that claimed “a global tax on capital is a utopian idea” and “the largest fortunes are to be taxed more heavily, and all types of assets are to be included: real estate, financial assets, and business assets – no exceptions”.

These are radical proposals. The Government has already stated that they will not introduce a wealth tax this term, but can we trust them? In the same Select Committee meeting, Minister Parker talked, perhaps unintentionally, about raising the trust tax rate to 39 per cent. This is a clear signal that Labour will certainly consider raising the tax rate if they get back into Government next year. Piketty stated in his conclusion to his book, ‘Capital in the Twenty-First Century’, that “all of my conclusions are by nature tenuous and deserve to be questioned and debated”. We should question Piketty, and we should definitely question the Government’s motives and challenge their policies on revenue.

The new Tax Principles Act will likely just be another policy on top of a pile of tax policies which the Government is using to punish ordinary New Zealanders who are trying to get ahead and work the best they can.

So far, the Government’s increases in taxes and its consequences through poorly executed policies have led to greater compliance costs and regulatory burden. When National is in government, we will make sure that taxes incentivise innovation, foster greater productivity and tackle the cost-of-living crisis.

Funded by Parliamentary Service. Authorised by Andrew Bayly, MP for Port Waikato, 7 Wesley Street, Pukekohe.


When National is in government, we will make sure that...


Andrew Bayly is the MP for Port Waikato, the Shadow Treasurer (Revenue) and the National Party spokesperson for Infrastructure and Statictics.

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