IRD defends trust tax changes

Proposals which could catch some trusts in a higher tax bracket are being defended by the Inland Revenue Department

Thursday, September 25th 2003, 9:06AM

by Rob Hosking

Proposals which could catch some trusts in a higher tax bracket are being defended by the Inland Revenue Department.

The proposals – which are subject to a discussion paper – relate to an extremely small group of trusts, the department’s national legal adviser, Graham Tubb, says.

PriceWaterhouse Coopers tax partner John Shewan earlier this week said the proposed change has caused alarm and the department needs to give an indication which outcome it would prefer to see from this review.

The department has stopped short of doing that. However Tubb says the review is an open one.

“We do want feedback on the point to make sure we have got it right.”

And he says that “Mum and Dad” trusts which include the family home and perhaps a few shares are unlikely to be affected.

“The actual proposed change is on quite a narrow point,” he told Good Returns.

The document applies to trading trusts which may be behind, or in error, in their tax payments. Those trusts would be up for penalty payments which would take taxation of their income to 45%, rather than whatever the marginal rate of the beneficiaries might be. “In the past we would have said that if a trading trust had arranged an instalment payment with the Commissioner for Inland Revenue to cover the mistake, they would still be able to be a qualifying trust – and therefore be subject to the normal rate of tax.

“Now, we think that interpretation of the law was wrong. If they haven’t got their tax obligations up to date then we think they would cease to be a qualifying trust – and therefore they are liable for the penalty rate.”

The Tax Administration Act now spells out a taxpayer’s obligations, says Tubb, and one of those is to getting the tax calculation right and paying on time.

“John Shewan comments on some anomalous outcomes of the proposals – a minor mistake leading to a trust becoming a non-qualifying trust, and thus liable for the penalty. That may be so, although our focus is on whether the trust has paid all its tax.

“I think it’s always been the case that if a trust hasn’t fully paid the tax it owes then the rules should be applied. What seems to have happened though is that over the years a bit of confusion has crept into the system and we felt it was time to clarify that.”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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