Associated Persons Update – July 2008

[nzfrazer]

Yes my understanding is that the losses are locked in the trust and can be carried forward. However profits from a Trading Trust can be distributed to the rental trust to offset the losses.

[Matt Gilligan]

Late nights and tainting

Yes.

Note that post 1/4/09 the two trusts will be associated persons so the rental trust will be tainted by the trading trust.

Maybe Matts late nights have been him trying to think a work around!

Sorry the late nights have not revealed a strategy to break association under new rules. The best thing to do is hold for 10 years in the rental Trust - then tainted properties are on capital account and non taxable.

[Matt Gilligan]

Trusts to Trust loss access NZ v Aussie

Yes my understanding is that the losses are locked in the trust and can be carried forward. However profits from a Trading Trust can be distributed to the rental trust to offset the losses.

Agree with this.

Also works in Australia, except in the Trust's Australian tax return the losses to carry forward will be forfeit unless the Trust makes a family Trust election. This is because in Aussie Trusts face loss continuity rules annually, and due to the fluid beneficiary structure, losses are forfeit in Aussie without the election.

Of course in the NZ tax returns for the Trusts, it works as stated.

Bet you never had that issue on your radar cross boarder ! Its a minefield in Aussie.

[Matt Gilligan]

Answer pending

[/font]Matt,

What do you see as watered down? I presume I'm missing something since I'm going from memory of the previous proposals, but they don't appear to have removed anything and have added a trustee / power of appointment test. Look worse to me.

I agree with your comments regarding the tripartite test, it is far too broad.

They also need an exception for charitable entities, otherwise currently (practically) every family trust in the country will be tainted, since they include charitable entities as a beneficiary and there are charities that carry on subdivision and building work. Hopefully whoever was responsible for drafting this has all of their properties in a family trust

Answer pending - give me a few hours to review this

[Matt Gilligan]

Watered down comment

[/font]Matt,

What do you see as watered down? I presume I'm missing something since I'm going from memory of the previous proposals, but they don't appear to have removed anything and have added a trustee / power of appointment test. Look worse to me.

I agree with your comments regarding the tripartite test, it is far too broad.

They also need an exception for charitable entities, otherwise currently (practically) every family trust in the country will be tainted, since they include charitable entities as a beneficiary and there are charities that carry on subdivision and building work. Hopefully whoever was responsible for drafting this has all of their properties in a family trust

The reason for that comment is that there are some limitations in the bill on the application of the tripartite test and the settlor-beneficiary and trustee-beneficiary association rules don't apply for the taxation of land sales.

The tripartite test is still the most wide reaching of the association tests but not as wide reaching as the discussion document potentially had it. They ruled out a couple of instances that were in there - the detail of which is mind boggling. If you really want to know, call Anthony Lipscombe in my office. He has the legislation/bill and will read it to you !

[CJ]

Thanks CJ. So has a workaround for the trust-trust tainting been announced, or is the solution simply to hold all rentals for at least 10 years?

Even if someone works it out, they wont say so. Why? Because the rules aren't even enacted yet so if it becomes knowledge, they will just close it down.

They can make changes any time up until enactment which may actually be after it comes into effect. Some of the rules (not the land, they come into effect from 1/4/09) come into effect as early as October. Submissions to the FEC will only just have closed by then (note, even this date hasn't been set yet!).

Add in election, a change in government (fingers crossed) and anything can happen.

[tpr2]

Profit distribution is fine as a reason to use a trust but I am still confused on why elect to have a trading trust over a company when both can distribute profits.
Matt you said it was because you had no way to distribute the losses from a company if the trading company made a loss. I was under the impression that trusts carried forward losses as well and so therefor the company vs trust for trading purposes is still the same however I would have thought the company structure provided a bit more flexibility.

cheers

Terry

[nzfrazer]

Terry, my understanding is that the reason a Trading Trust is preferred over a Company is that Trust-Trust does not taint under current rules, whereas Company-Trust will taint.

[tpr2]

Terry, my understanding is that the reason a Trading Trust is preferred over a Company is that Trust-Trust does not taint under current rules, whereas Company-Trust will taint.

Hi nzfrazer

Thanks for that. That certainly makes sense indeed.

We don't have those sorts of issues in Oz as you pay capital gains tax anyway on any property bought that is not your PPR.

Thanks again ...that certainly deserved a slap on the forehead from myself.

{action...terry slapping head and saying doh!}

cheers

Terry