INCOME TAX LEGISLATION CHANGES - widening of the associated persons rule
New legislation changes to the associated persons rules in the Income Tax Act have the effect of significantly extending, among other things, the scope of associated persons for the purpose of the land transaction provisions and the distribution of capital gain amounts from companies who have sold assets to a person that is associated with that company.
An increased complexity in the associated rules arises through the application of the aggregation tests and the tripartite tests so that:
(a) Under the aggregation rules a person is treated as holding any shares held by someone who is associated with them;
(b) Under the tripartite test, and with two exceptions, two persons (A and C) will be associated when they are both associated with B under the same test.
There is no simple example that can illustrate the effect of the new association rules. The complexity means that it is necessary to work through the rules in relation to each situation after identifying your business or family structure and
the nature of the activities being undertaken.
Trusts
Additional tests focusing on control of a trust affects any person who is a settlor of a trust (including a person treated as being a settlor) or who holds the power of appointment or removal of trustees of a trust. You will need to identify any trusts that you may be a settlor for, or have power of appointment of, and be clear as to the activities undertaken by those trusts as these may affect you. Also, your activities may affect trusts that are outside of your business or family structure.
A general effect of the new rules is also that the association of two trusts is significantly widened.
Land Transaction Provisions
The land transaction provisions have the effect of taxing capital gains where a person buys land and, at the relevant time, is associated with a person who is in the business of building, land development, or land dealing.
The range of persons who will be associated for the purpose of the land transaction provisions is also now significantly wider.
The new associated persons provisions apply to land acquired on or after 6 October 2009 or to building improvements commenced by a person in a building business from that date (irrespective of when the land was acquired).
The land transaction provisions generally only affect investments that are not held for more than ten years. If you buy good property with long term view in mind, there may not be a tax issue; however, it is important that you are aware of any tax implications when you buy property.
If you think you may be affected by the change in the rules, or may affect another entity through your activities we suggest that you seek further advice.
Companies - distribution of capital gains amounts
The substitution of the associated persons definition for the current, narrower definition of "related person" will reduce the ability of companies to restructure while ensuring that proceeds derived from the disposal of capital assets continue to be able to be distributed tax free to shareholders on liquidation of a company.
The general association rules apply with effect from 1 April 2010 (2011 income year). If you are considering a restructure of your company activities that may involve the sale of assets, it may be beneficial to complete this process prior to the commencement of your 2011 income year.
COMMENT
In our view these new rules are especially unfair to land developers and builders, and anyone associated with them. Unfair because a car dealer (or associated parties) can own investments cars, and a sharebroker (or associated parties) can own investment shares. Why penalise land developers and builders (and their associates) wanting to own investment land?
Secondly, the rules add another whole layer of complexity to tax compliance, just like the new foreign investment rules introduced two years ago. This adds more non-productive cost to our economy, when the catch-phrase is "improve productivity".
Thirdly, due to the imposition of tax on paper value gains it is now even more difficult for companies to restructure to better, more relevant commercial structures.
Lastly, this legislation was propagated under the Clark/Cullen regime, but enacted by a so-called business/entrepreneur friendly Key/English regime. They could have/should have just parked it.
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.
