TAX UPDATE 22 Feb 2013
UNINTENDED EFFECT OF ASSOCIATED PERSONS RULES
The associated persons rules were introduced as an extensive anti-avoidance mechanism and apply widely to stop taxpayers from gaining unintended tax advantages. When these rules are applied to land sales, they effectively give a back door capital gains tax.
The New Zealand Law Society's focus on trusts continues, with a December release expressing concern over unintended consequences of the associated person rules for professional trustees. The associated persons rules, found in subpart YB of the Income Tax Act 2007 (the Act), provide that a trustee is associated to a person where the trustee holds a power of appointment or removal.
This should raise flags for professional trustees, who often hold joint powers of appointment for their clients, and may find themselves taking the reigns in the event of death or retirement of any other named appointer in the deed.
A professional trustee may find themselves "tainted" under the land taxation rules so that an amount derived from the sale of land might be brought into the tax net, regardless of whether the land was purchased with that intention, or for the purpose of a developer's business. For those who are professional trustees for a number of trusts, this creates significant risk.
The tripartite test in s YB 14 of the Act creates further potential mischief, in that it may associate the trustees with other associates of those holding powers of appointment.
The Law Society's highlighting of this risk comes at a time when many professionals may be questioning the value in undertaking trustee obligations at all, following last year's Court of Appeal decision in Newmarket Trustees (discussed in earlier issues).
Affirming that this association cannot have been intended by the rules, the Law Society has proposed that the association should not apply to those holding the role in a professional capacity, in order to better protect such advisors. This will apply to a trustee who is a member of an "approved organisation", i.e. people who are subject to a professional code of conduct and disciplinary process, as well as typically providing trustee services in the course of their business.
How it affects you
If you have responsibilities as a professional trustee, now may be a good time to review your position from a risk perspective.
If you have a professional trustee involved in your trust, you should discuss whether there are any associations that may be harmful with your advisor.
CHANGES TO TAKE EFFECT 1 APRIL 2013
We have discussed the importance of GST treatment for the sale and purchase of land, particularly in respect of ADLS agreements, in a recent issue.
That need for care and certainty continues to be highlighted with the Court of Appeal's recent approach to market valuations of property.
In a recent family dispute, the Court held that whether the current market value of a property includes GST must be determined by the context of the deed.
The dispute centred around the distribution of estate assets. In particular, one son, who had long resided in a property, was going to have property transferred to him personally (or through a nominee), at a GST exclusive value. He was not registered for GST.
The other children disputed this, with another brother arguing for a GST inclusive value to be determined.
Submissions were made to the Court supporting each side. Relying on case law, the Court held that the correct market value of the property in this case was a GST exclusive value.
A clause in the settlement deed had expressly referred to the transfer of other estate properties, holding that the four children would share equally in the cost of any tax payable. The Court also found that an entitlement to "market value" is exactly that, not "market value plus GST". Furthermore, there could not be two separate market values, to be determined by the GST status of the purchaser.
deductions at 3%. If the employee is less than 18 years of age, employers will not need to make employer contributions.
For the 2012-2013, and future tax years, individuals can no longer claim the:
• Childcare and housekeeper tax credit, and
• Tax credit for income under $9,880.
Consequently, employees using either the ML or ML SL tax code, from 1 April 2013 will have to have PAYE deducted using M or M SL rates as appropriate, unless they complete a new Tax code declaration (IR330) form.
From 1 April 2013, the Student Loan repayment rate for standard deductions will increase from 10% to 12%. Employers will deduct at the new rate for the period ended 30 April 2013 and all future periods.
How it affects you
There are a number of changes that employers will be required to make from 1 April 2013. Speak to your advisor if you would like any assistance with implementing the changes.
POINTS OF INTEREST…
The Finance and Expenditure Committee has reported back to Parliament on the Student Loan Scheme Amendment Bill (No 2).
The IRD has released the "National Standard Costs for Specified Livestock Determination 2013" applying to specified livestock on hand at the end of the 2012/13 income year.
New Zealand's anti-money laundering reform continues, with changes coming into effect on 30 June 2013. Phase two is predicted to come into effect in 2014.
TO THE POINT…
Wherever you see a successful business, someone once made a courageous decision