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Associated Persons Update – July 2008
From Matthew Gilligan, Gilligan Rowe & Associates Ltd
The long awaited next step in the IRD’s review of the Associated Persons Provisions arrived last week with the tabling of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill.
As you may recall, in May 2007 the IRD released a discussion document which proposed substantial changes to the Associated Persons Provisions. Changes to the association rules in relation to the taxation of land transactions was particularly in focus. These proposals generated an unusually large amount of feedback and as a result the draft legislation that was expected to be issued in November 2007 has not surfaced until now.
Despite what we understand to have been a large amount of opposition to the breadth of the proposals, the Bill that has been tabled is only a slightly watered down version of the proposed rules. In releasing the Bill the IRD have again made it clear that they consider that there are major weaknesses in the existing associated person’s definitions for the taxation of land transactions and as a result the Bill focuses heavily on widening the rules in relation to association between:
§ Two companies.
§ Trusts and settlors and / or appointors.
§ Two Trusts.
Whilst the rules of association between Trusts and Companies are proposed to be significantly strengthened perhaps of even greater consequence is the inclusion of a tripartite test.
A tripartite test is something of a “daisy chaining” test which sees two parties who are not directly associated under the rules being deemed to be associated if they are associated to a common party in the middle. In other words parties A and C might not be directly associated under the rules (including the new extensive rules in relation to Trusts and companies), but then end up being deemed to be associated because both of them are associated to a common party being party B. The tripartite test has long been used in the context of GST and represents an extremely wide reaching test of association.
In summary, the key points to note at this time are:
§ For the time being the existing association rules apply. Therefore if you have taken care to structure yourself so that new acquisitions of property are not tainted, then new acquisitions will continue to not be tainted until these new rules come into force.
§ The new rules are projected to come into force on 1 April 2009. This means that properties acquired prior to this date will not be tainted if association happens to exist after this date. Although care should be taken if you are in the business of erecting buildings as the timing of association under this test is different to dealers or developers.
§ This is still not finalised legislation. The Bill is only at first reading stage which means that it still has to go through a select committee and house debate. Naturally we will be monitoring its progress and update you as appropriate.
§ The use of a Trading Trust is common for property dealing / development activities and it should be noted that this may still continue to be the case even when these new rules come into force. This is because Trusts have other benefits such as greater flexibility in distributing income and capital as well as flat tax rates of 33%. None of these benefits will be affected by the new rules.
In summary the rule change will affect all dealers in land, property traders and builders who also intend to purchase investment property after 1.4.09. A three Trust structure is still appropriate once the rules come in, though you will be tainted from 1.4.09. The ten year rule saying if you keep a tainted property for ten years it looses its tainted status, is unchanged ( good news). Properties acquired prior to 1.4.09 are not affected by this rule change and will not be taxable if sold after that time, assuming you were correctly structured prior to 1.4.09 and broke tainting at time of acquisition.
If you are planning to conduct both property dealing / development activity and buying investment properties in the future then you will need to seek further advice as the landscape is changing.
Please contact us at Gilligan Rowe & Associates if you would like to discuss this further.
From Matthew Gilligan, Gilligan Rowe & Associates Ltd
The long awaited next step in the IRD’s review of the Associated Persons Provisions arrived last week with the tabling of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill.
As you may recall, in May 2007 the IRD released a discussion document which proposed substantial changes to the Associated Persons Provisions. Changes to the association rules in relation to the taxation of land transactions was particularly in focus. These proposals generated an unusually large amount of feedback and as a result the draft legislation that was expected to be issued in November 2007 has not surfaced until now.
Despite what we understand to have been a large amount of opposition to the breadth of the proposals, the Bill that has been tabled is only a slightly watered down version of the proposed rules. In releasing the Bill the IRD have again made it clear that they consider that there are major weaknesses in the existing associated person’s definitions for the taxation of land transactions and as a result the Bill focuses heavily on widening the rules in relation to association between:
§ Two companies.
§ Trusts and settlors and / or appointors.
§ Two Trusts.
Whilst the rules of association between Trusts and Companies are proposed to be significantly strengthened perhaps of even greater consequence is the inclusion of a tripartite test.
A tripartite test is something of a “daisy chaining” test which sees two parties who are not directly associated under the rules being deemed to be associated if they are associated to a common party in the middle. In other words parties A and C might not be directly associated under the rules (including the new extensive rules in relation to Trusts and companies), but then end up being deemed to be associated because both of them are associated to a common party being party B. The tripartite test has long been used in the context of GST and represents an extremely wide reaching test of association.
In summary, the key points to note at this time are:
§ For the time being the existing association rules apply. Therefore if you have taken care to structure yourself so that new acquisitions of property are not tainted, then new acquisitions will continue to not be tainted until these new rules come into force.
§ The new rules are projected to come into force on 1 April 2009. This means that properties acquired prior to this date will not be tainted if association happens to exist after this date. Although care should be taken if you are in the business of erecting buildings as the timing of association under this test is different to dealers or developers.
§ This is still not finalised legislation. The Bill is only at first reading stage which means that it still has to go through a select committee and house debate. Naturally we will be monitoring its progress and update you as appropriate.
§ The use of a Trading Trust is common for property dealing / development activities and it should be noted that this may still continue to be the case even when these new rules come into force. This is because Trusts have other benefits such as greater flexibility in distributing income and capital as well as flat tax rates of 33%. None of these benefits will be affected by the new rules.
In summary the rule change will affect all dealers in land, property traders and builders who also intend to purchase investment property after 1.4.09. A three Trust structure is still appropriate once the rules come in, though you will be tainted from 1.4.09. The ten year rule saying if you keep a tainted property for ten years it looses its tainted status, is unchanged ( good news). Properties acquired prior to 1.4.09 are not affected by this rule change and will not be taxable if sold after that time, assuming you were correctly structured prior to 1.4.09 and broke tainting at time of acquisition.
If you are planning to conduct both property dealing / development activity and buying investment properties in the future then you will need to seek further advice as the landscape is changing.
Please contact us at Gilligan Rowe & Associates if you would like to discuss this further.
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