Tax News

Legislation has recently been passed by Parliament to amend the definition for "associated persons" in the Income Tax Act 2007.  These far reaching changes may have significant implications for many people (companies, trusts, individuals) who have recently, or are contemplating, engaging in land transactions.

From a surveying perspective, our branch manager Seamus says it is important your surveyor is aware of these implications before a paper trail is developed during any potential project.  This is particularly important in the infancy of subdivision feasibility assessment.  Until now it has been relatively easy to create separate structures, effectively controlled by the same person, without the structures being "associated".

The land development business (taxable) could be undertaken by one entity and with gains on sales through another entity (not associated to the first) being tax free capital gains. 

However the net has been widened with a much more comprehensive set of definitions of "associated person".  Among the changes is the tripartite test.  For example, if A and B are associated and B and C are associated, then A and C are associated.

Why is this important?
Proceeds from land transactions may be taxable due to the "tainting" of the transaction by activities of an associated person.  Tainting can occur where an associated person is in the business of dealing in land, developing or subdividing land, or erecting buildings.  The profits from a transaction that would normally be considered to be a capital gain and tax free can be deemed to be taxable due to the activities of associated persons.

With the changes introducing a much more comprehensive set of associated persons definitions, it is now very difficult for developers, dealers and builders to form new entities to get around tainting by association.  If a taxpayer is now associated with a property developer, dealer or builder and disposes of their investment property within 10 years, they may be exposed to tax on any profit that might have been previously considered captial gain.

Application Date
For the purposes of land provisions of the Income Tax Act 2007, except for the section that relates to disposal of land within 10 years of completing improvements (Section CB11), the changes apply to land acquired on or after 6 October 2009.  Note that land acquired prior to this date is not affected by the changes.

Relief
If an entity becomes tainted by association, it may not be a permanent problem.  The entity is tainted only while the associated person is in the business of land dealing, developing or building.  Once the activity ceases, then the tainting of further acquisitions also ceases.  The crucial time to consider whether tainting by the activities of the associated person is an issue, is the date the land is acquired.

Note that there are some exemptions available with respect to residential and business premises that may take transactions outside of the tax net, even though the transaction is tainted.

This is a difficult area, made even more complex with this latest legislation.  You should get advice from a professional experienced in this area to review your existing structures in light of the recent changes when contemplating any new land transactions.

Peter Ogier
Taylor Ogier Limited
Chartered Accountants
Napier