IRD eyeing trustees’ use of charities to avoid tax

Inland Revenue is suggesting trustees may be using charities to avoid paying tax.

The department has published data it collected in the 2022 income tax year, after a law change empowered it to require trustees to disclose more information about themselves.

Among the findings, it identified 500 instances where trust income was allocated to tax-exempt charities, but not physically paid to those charities.

Former PWC partner turned consultant, Geof Nightingale, explained that if a trust had money in the bank that earned interest, that income would be taxed at the trustee tax rate.

If the trust distributed that interest income to a beneficiary within the same year it was earned, that income would be taxed at the beneficiary’s tax rate.

If the beneficiary were a charity, the tax rate would be zero.

So, trustees could game the system by making accounting entries saying they’d transferred funds to charities, all the while keeping the funds in the trust – earning more interest in the case of a bank deposit, for example.

Inland Revenue recognised that trustees who didn’t physically pass the funds on to the charities they said they would in 2022, might have done so in 2023.

It said it was now collecting opening and closing balances owed to beneficiaries to monitor the situation.

Inland Revenue also noted that in Australia, payments need to be made within two months of notification. Otherwise, the income is taxed at the trustee rate.

Nightingale said Inland Revenue’s findings suggested there could be a policy loophole that required attention.

However, Deloitte partner Joanne McCrae was wary of jumping the gun.

She believed Inland Revenue had to collect more data over more years to better understand the extent of the issue. In her experience, she hadn’t seen this to be a problem.

McCrae noted if a trust allocated funds to a charity, it had a legal liability to that charity, so couldn’t spend the money on something else.