The Inland Revenue Department and the Treasury have released the issues paper examining the definitions of associated persons in the Income Tax Act 2004. There are two main themes;
- The perceived weaknesses in the current general definition and the definition that applies for land sales. For example, the associated person’s definition that applies for land sales currently allows land dealers, developers and builders to escape tax by operating through closely connected entities.
- Replacing the current four definitions of associated persons with one standardised definition. This would be a significant rationalisation and make the associated persons concept in the Act more coherent.
It is proposed that
- the current general associated persons definition in relation to trusts be addressed by having tests associating a trustee and beneficiary, trustee and settlor, two trustees with the same settlor, and a settlor and beneficiary;
- the new definition have more robust rules aggregating the interests of associates to prevent the tests associating two companies and a company and an individual being circumvented by the fragmentation of interests among close associates;
- the new definition have a tripartite test associating two persons if they are each associated with the same third person, thereby making the definition of associated persons as a whole more difficult to circumvent;
- the associated persons tests for relatives in the new definition extend to two degrees of relationship only instead of four degrees, as s OD 7 does currently.
Our Comment
Whilst rationalisation to one general definition makes good sense, the outcome in terms of tax on land transactions would be unfair and, at least, the current provisions in relation to land should be allowed to continue.
Why? The current land provisions enables developers and builders to separate land they own into either capital (non-taxable) or revenue accounts. Legislation allowing this has been in place since the 1970’s and delivers a fair outcome being rules that are basically the same for all taxpayers.
Those affected may wish to consider making submissions. We can advise on this process if required.
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Important: This is not advice. Readers should not act solely on the basis of the material contained in this report. Items herein are general comments only and do not constitute or convey advice perse. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas.
