NZ Tax Update - Changes of interest to the property sector

Your circle of associates may get wider

To say that your circle of associates has become wider may be a good thing in a social context, but it is usually not a good thing in a tax context. However, this is the position that will result if the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill (Bill) is passed in its current form. The Bill introduces a change to the definition of 'associated persons' that will apply for income tax purposes.

The Bill intends replacing the four definitions that currently exist in the Income Tax Act 2007 (Act) with one standardised definition of 'associated persons'. This has the potential to impact on all land owners. The commentary to the Bill indicates that the change is intended to close gaps in the definition relating to land sales that allow land dealers, developers and builders to circumvent the rules by operating through connected persons. However, many people view the change as an extension to the current tax base, as was seen from submissions made on the discussion document that preceded the Bill.

Currently, the land rules mainly adopt the associated persons tests applicable to the '1973 version provisions' (in essence, the old section OD 8(4) tests from the Income Tax Act 2004). These provide tests of association for:

• Company - company.
• Company - person.
• Natural person - natural person.
• Partnership - partner.
• Partnership - partner's associate.

The new definition in the Bill provides tests of association for:

• Company - company.
• Company - person.
• Natural person - natural person.
• Person - trustee for relative.
• Trustee - trustee (where there is a common settlor).
• Trustee - person holding power to appoint/remove trustee.
• Partnership - partner.
• Partnership - partner's associate.
• Daisy-chaining.

The daisy-chain test, referred to in the Bill as a tripartite test, associates two persons if they are each associated with the same third person. The daisy-chaining approach currently exists in the associated persons tests that apply for other aspects of the Act. In practice, it can be a time-consuming and sometimes costly and complex exercise to ascertain whether or not any association exists.

Overall, if the Bill proceeds in its current form, it will make the application of the associated persons tests much wider and will bring into the scope of the land rules persons who currently are outside of them. The suggestion that the changes are necessary to close gaps in the legislation is debateable, and the suggestion that the changes are anti-avoidance in nature is highly debateable.

Those persons who are or may be impacted by the proposed reforms are encouraged to make submissions on the Bill. We anticipate that the closing date for submissions on the Bill will be 22 August 2008.

GST issues paper

The closing date for submissions on the issues paper 'Options for strengthening GST neutrality in business-to-business transactions' has been extended to 11 August 2008. For those who are not aware of this issues paper, it highlights certain issues that arise under the Goods and Services Tax Act 1985 (GST Act) and discusses alternative ways of addressing these issues. A couple of these issues are of particular relevance to the property sector.

Zero-rating or domestic reverse charge

At present, the supply of goods as a 'going concern' may be zero-rated if the parties agree to treat the supply in that manner and the statutory requirements are met. If a transaction does not comply with the requirements, the supplier can face an unexpected GST liability and the risk of shortfall penalties and use-of-money interest (UOMI).

The issues paper proposes to replace the 'going concern' rules with new 'domestic reverse charge' rules. The domestic reverse charge rules would shift the obligation to charge GST from the GST-registered supplier to the GST-registered recipient. It would require the recipient of the goods and services (who needs to be registered for GST at the time of supply) to self-assess GST on the purchase (ie on what would otherwise be the supplier's output tax) and deduct input tax in the same taxable period. The time of supply would be the settlement date of a transaction.

Under the proposals, the supplier would be required to confirm that the purchaser is registered for GST and to retain supporting documentation. If the supplier were unable to verify the GST-registration number of the purchaser at the time of supply, the supplier would need to charge GST under the normal rules. The parties would need to confirm in the agreement for sale and purchase that the transaction is subject to the domestic reverse charge mechanism.

The proposals are aimed at mitigating the risk of the zero-rating status being later overturned by the IRD and the parties suffering the added expense of GST, penalties and UOMI.

Nominations

In cases involving nominations and assignments where the nominee or assignee pays the purchase price to the vendor, the proposal is to deem the supply as being made from the vendor to the nominee or assignee. As a result, the vendor would have to account for the GST, and the nominee or assignee could demand a tax invoice and claim the input tax credit (provided it met the normal requirements for claiming these). The proposals note that a two-supply analysis may still be relevant in some transactions, for example, where both the named purchaser and nominee have contributed to the purchase price.

The proposals are aimed at clarifying the treatment of nominee transactions (currently there is some debate as to the correct treatment of these) and averting the need for 'GST set-offs' between vendor and purchaser (which are usually done to ease the cash flow burden on the purchaser).

For more information on the Bill or issues paper, or if you would like assistance in making a submission on either of these, please contact:

Lynette Smith, Partner
Tel +64 9 300 3812
lynette.smith@dlaphillipsfox.com

Justin March, Partner
Tel +64 9 300 3846
justin.march@dlaphillipsfox.com

Sharon Skinner, Partner
Tel +64 4 474 3260
sharon.skinner@dlaphillipsfox.com

Tameela Bandara, Lawyer
Tel +64 9 300 3801
tameela.bandara@dlaphillipsfox.com