The Taxation (International Taxation, Life Insurance and Remedial Matters) Bill was reported back from the Select Committee on 30 June. It contains new associated persons rules in a near final form and will be enacted soon. Taxpayers are likely to find themselves associated with a much wider group of persons under the new rules.
As such, taxpayers who count on being unassociated with certain persons (property developers for example) should examine the new rules closely. In particular, structures which some taxpayers have established to prevent the associated persons rules from applying in the past are unlikely to be effective under the new rules.
Changes in the Bill
The Select Committee made some changes to the associated person rules, but left their substance largely unchanged (click here for our Counsel on the earlier rules). In particular, the controversial “tripartite rule” (which associates two persons if they are each associated with the same third person) has been retained, although it now does not apply if two persons are both associated with a third person under the same section (or under either of the two sections relating to companies). Therefore two persons will not be associated, for example, merely because they are shareholders in the same company.
The other changes to the Bill following the Select Committee’s report are as follows:
- A new application date. The rules now apply from:
- the date the Bill receives royal assent for the purposes of the land provisions, and
- the beginning of the 2010 income year for all other purposes.
- For the purposes of the land provisions:
- a company cannot be associated with another company which is a PIE;
- a wider aggregation rule (which deems a person to hold any shares held by certain associates) applies in determining whether a company and a non corporate are associated, and
- a person is no longer associated with a trustee because they are related to a beneficiary.
- Two persons who are married or in a de facto relationship etc are deemed to be the same person for the purposes of the rule associating two trusts if they have a common settlor. Consequently, two trusts will be associated if they are settled by the same person or his/her partner.
- A person is not associated with a relative they cannot reasonably be expected to know about.
- Exceptions from some of the associated person provisions have been introduced for charitable trusts, an energy lines trust and certain approved unit trusts. This will prevent, for example, all donors to a charity becoming associated with each other.
- An aggregation rule has been introduced for the limited partnership association test. Consequently, a limited partner will be associated with a limited partnership in which they or their associates hold 25% or more.
- The rule associating a partnership and an associate of a partner has been removed.
- An exception has been introduced to the rule associating a trustee and an appointor for qualifying employee trusts.
What you should be thinking about
The new associated person rules have a much wider scope than the current provisions. Consequently, most taxpayers will be associated with a significantly larger group of persons under the new rules.
This is a particular issue for taxpayers who have relied on certain structures to break associations between related entities. For example, the use of a double trust structure was generally considered effective in breaking the association between a property developer and a related investment trust. Consequently, the related investment trust (or a company owned by it) was able to sell investment properties held on capital account within 10 years of acquisition without being taxable on any profit.
However, these double trust structures will most likely be ineffective under the new rules. This is because:
- the two trusts will usually be associated by virtue of having the same settlor or appointer - the tax definition of settlor is very broad and includes indirect settlements, and
- the investment trust (or the company owned by it) will then be associated with the property development entity either directly or under the tripartite rule (and/or the aggregation rule).
Accordingly, any new land acquired by the investment trust after the date the Bill is enacted could not be sold tax free within 10 years of acquisition. The tax treatment of land acquired by the investment trust before the Bill’s enactment will not be affected (unless construction work is commenced on the land after the date of the Bill’s enactment).
All taxpayers whose tax treatment depends on whether they are associated with certain persons should carefully check the new rules to determine their status. Taxpayers who have been relying on a structure to break an association between related entities in particular should review the new rules, as they are likely to find themselves associated.
For further information, or clarification on the new associated persons rules, please contact our tax team.
Our thanks to Sam Rowe for writing this edition of Brief Counsel.