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Associated Person’s Rules: Update for Property Investors

AUTHOR: Matthew Gilligan

POSTED: 26 April 2009

In a welcome development for taxpayers, the Minister of Revenue, Peter Dunne, has recommended to the Finance and Expenditure Select Committee considering the new associated persons rules (for dealers in land, developers, and builders) that the implementation date of these rules be delayed.

To recap, legislation has been drafted which is proposed to apply to land acquired on or after 1 April 2009. The proposed legislation includes new associated persons rules which drastically widen the existing definition of an associated person, causing developers'/traders'/builders' other entities (and potentially their relatives) to have their capital gains taxable, no matter what structure they adopt.

Executive Summary

The legislation is currently before Select Committee but has been significantly delayed due to the intervention of the election. The Select Committee is only due to report back to Parliament on 30 June of this year. This has raised the issue of the legislation having retrospective effect which would mean that taxpayers would not know when they acquire property after 1 April but before the enactment of the legislations whether property that they have is tainted under new associated rules or not. For example despite the legislation not being passed, if a builder or dealer in land or developer acquired a property in an LAQC not associated to their trading trust on the 1 of April, they may or may not have been tainted under previous indications from IRD. It was unclear as to the position taxpayers were in. Now it is clear – the old rules still apply until at least July, but possibly later (perhaps even next year).

Background

Fortunately it seems that common sense is going to prevail and that the implementation of these rules is going to be delayed. In his recommendation, Peter Dunne has suggested that the new rules apply to land acquired on or after the date of the Bill's enactment or, where there is association to a builder, applying to improvements on or after the date of enactment.

This is a potentially significant development for taxpayers and one which GRA welcomes. What this means is that taxpayers will have certainty on transactions that occur post 1 April but prior to the enactment of the new rules as to how they are going to be treated.

As the original application date of 1 April 2009 has loomed we have been dealing with a number of clients in relation to moving property between entities prior to that date to make sure there is no tainting. We now note that there is further opportunity for that to be done and we encourage you to contact us if you have any queries in this regard.

In terms of the implementation of the rules, at GRA we still see it as almost inevitable that there will be amendment to the associated persons provisions. Our pick is that the breadth of the rules as proposed will be narrowed, but we certainly expect them to be wider than the current form in relation to land tax provisions.

As to a potential application date, it seems that it will be no earlier than the enactment date which is likely to be mid to late this year. We also note the prospect of it being delayed further and we are aware of submissions to the Select Committee that strongly suggest that it be delayed until at least 1 April 2010. Naturally we will keep abreast of these developments and let you know any progress.

There are pre-rule change planning opportunities for those in the business of dealing, developing and trading. Feel free to call us on +64 9 522 7955 or request a meeting if you have queries in this regard.

Thank you for reading this.

Request a Meeting

Matthew Gilligan
Director

09 522-7955

mg@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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