The well publicised new Associated Persons Rules are due to come into force within the next week or two and already there is uncertainty about their application. The rules are possibly the most complex part in the Income Tax Act, and what makes things worse is that they play a very important role in the taxation of some of the largest assets traded in New Zealand – i.e. real property. It is therefore very important that everyone understands exactly what they are, and how to apply them.
The specific rule that this entry focuses on is the rule associating trustees and a person with the power of appointment of trustees (also sometimes called the protector). The rule is simply stated, but not so simple to apply. In the simplest context where there is one person with the power of appointment the rule is fairly straightforward to apply. Clearly that person will be associated with the trustees.
However, the question becomes a lot harder to answer where either the trustees, or a majority of the trustees, have the power of appointment. Where the majority of trustees have the power of appointment, will they together constitute a person with the power of appointment, or will the Act look to each of the trustees in their personal capacity to see if either of them individually has the power of appointment?
In order to make sense of this rule it is important to first begin with the definitions. The most important definition in this context is that of “person” for it is a person who is associated with the trustees. Note, the question is not about the definition of a “taxpayer”, as “taxpayer” is not mentioned in the section, therefore cases such as Case L72 (1989) 11 NZTC 1,419 may be difficult to apply as that case concerned taxpayers acting in different capacities.
How is a person defined in the Income Tax Act 2007? Although the Act uses the term 1044 times, it does not define what is meant by “person” for the general purposes of the Act, so readers are left to fall back on the definition in the Interpretation Act 1999. The Interpretation Act 1999 defines a person as follows in section 29: “In an enactment …Person includes a corporation sole, a body corporate, and an unincorporated body”.
Although it is fairly clear what a corporation sole or a body corporate means, the same cannot be said for the term “unincorporated body”. It is commonly accepted that the trustees acting in their capacity as trustees form an unincorporated body of persons. They also form a different taxpayer, but that is not relevant for the purposes of the present discussion. Why are they an unincorporated body of persons? It must be because they are bound to act together by the trust deed. So will the majority of trustees be a separate person if they hold the power of appointment? I cannot see why not, but I am no trust law expert (perhaps an expert could comment on this point). A new person will surely have been created by the trust deed in terms of the Interpretation Act definition, and it is this new person that is associated with the trustees.
What, you may ask, is the practical implication of all this? It is this: if the majority of trustees are not a separate person then it may be that each of the trustees in their personal capacity is associated with the trust. In any situations where the trustees are professional trustees this could obviously cause some serious problems. If the majority of trustees were a different person, then this would seem to be a convenient way to break the association. For example, where you have a husband and wife with a professional advisor as trustees, instead of providing that the husband and wife have the power of appointment, provide that the majority of trustees have the power of appointment. If the husband or wife had the power of appointment they would be associated with the trustees. However, if the majority of trustees, a separate person, had the power of appointment, it would be that separate person, and not the husband or wife, who was associated with the trust.
The situations where this analysis could be useful may be very limited, and it may be that neither the Courts nor the IRD share my views. However, the analysis does seem to overcome the problems caused for professional advisors where they are one of the trustees, and the majority of trustees have been granted the power of appointment of trustees. If New Zealand had a proper capital gains tax then the impact of the Associated Persons Rules on the taxation of land transactions would be greatly diminished. A capital gains tax may cause some problems of its own, however, but it must surely be only a matter of time before we get one.
For other articles relating to New Zealand law refer to our firm’s New Zealand Lawyers blog.
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