Proposed changes seek to prevent the independent trustee of a trust and the trust, or two different trusts with the same corporate trustee, from becoming “associated persons” for income tax purposes.
The need for change: High Court GST input tax credit decisions
The need for the proposed changes arises from two High Court decisions: Concepts 124 Ltd v CIR  NZHC 2140 and Staithes Drive Development Ltd v CIR  NZHC 2593. These cases considered whether GST input tax could be claimed on the purchase of property between companies owned by a common person or company acting in their capacity as trustees.
The question arose whether two companies owned by different trusts which happened to have a common trustee were under “the control by any other means” of that same trustee and therefore “associated”.
If the companies were not associated, the purchasing company could obtain a full input tax credit based on the purchase price it paid to the vendor company. On the other hand, association would mean that the purchasing company could not claim GST for any increase in the value of the property while it was owned by the vendor company.
High Court decisions go against commonly held view on trustee capacity
Most commentators were of the view that the different capacity in which the corporate trustee acted when dealing with different trusts meant the parties could not be associated. However, Inland Revenue argued Parliamentary policy warranted a wide interpretation of the associated persons test to cover common corporate trustees even between companies owned by otherwise unrelated trusts.
Despite the obvious risks in such a wide interpretation and the argument’s failure to acknowledge the established legal differences between acting in more than one capacity, Inland Revenue’s argument was accepted by the High Court in both cases. This outcome resulted in a minor victory for Inland Revenue with respect to GST.
Wider income tax implications
Inland Revenue’s interpretation also opened wider income tax possibilities for companies owned by different trusts with common trustees.
In addition to some disadvantageous consequences, such as tainting for the property rules, there was also the potential for these companies to take advantage of their new-found associated status for income tax purposes. Potential advantages included the ability to potentially group and offset tax losses or take advantage of other benefits available to associated taxpayers.
Legislative change proposed
While Inland Revenue maintains the original GST decisions were correct, it has now moved to close the potential income tax advantages.
Proposed changes seek to amend the “associated persons” rules for income tax purposes to clearly distinguish between:
- A person or company’s capacity as a trustee of a trust, and
- Their own separate personal capacity.
This change ensures the trustees own activities and the activities of each different trust remain separate.
To give effect to this change the definition of “company” and “natural person” are being amended to expressly exclude their trust capacity. A number of other consequential changes are also required to take account of the separate capacity in which a company or a person is acting to ensure the separation of their own and each trust’s tax affairs.
GST amendment to validate outcome of High Court decisions
Interestingly, rather than acknowledging the flaw in its approach to the original High Court cases, Inland Revenue also proposes an amendment to the Goods and Services Tax Act 1985 to maintain the refusal to permit input tax in those circumstances. This time based not on the existence of a common trustee, but on the ability of a common person to hold the power of appointment or removal of trustees and/or beneficiaries (regardless of the capacity in which that person is acting).
If the High Court cases and proposed amendments have left you uncertain about the rules of association for trusts, or if you would like to have your say on the proposed changes, please contact EY Law or your usual EY contact.