Observations
Necessarily, Inland Revenue’s guidance is based on the draft legislation as originally introduced into Parliament. That Bill is proceeding through a Select Committee process, where public submissions were sought. Those submissions, including by KPMG, raised various concerns, including the potential for over-taxation and the limitations of the limited carve-outs. In particular, it is worth noting that Inland Revenue’s guidance raises potential tax avoidance concerns with a key option that the original commentary accompanying the 39% trustee rate change suggested to mitigate over-taxation – resettling lower rate beneficiary distributions back on the trust. If there are changes to the draft legislation, in response to these concerns, then the guidance may need updating. However, this will not be known until March, when the Select Committee’s report back is due. Therefore, those looking to make decisions now around their trust arrangements, in anticipation of a 1 April start date, need to keep in mind that the final legislation could end up being different. This could also impact Inland Revenue's guidance.
Even if there are no substantive changes to the current draft legislation, as with any guidance, whether a transaction or restructure is likely to be acceptable, or not, will ultimately depend on the specific facts and circumstances. These are not questions with “black” and “white” answers. For example, while Inland Revenue’s view is that changing investment structures from a trust to a company, in and of itself, should not create tax avoidance concerns, how this is given effect may raise questions. If the transfer of assets is in consideration for a loan by the new company (compared to, say, the issue of equity) we can certainly see Inland Revenue asking some questions. The details (including the “how” and “why”) can matter and should not be overlooked.
In summary, Inland Revenue’s high-level guidance is a useful addition, but needs to be viewed in the context of the above. If there is any doubt, we recommend talking to your tax advisors, including on options to get greater certainty.
