Clauses 7, 10–13, 18, 40, 41, 57, 82, 120, 152, 182, 183, 186, 188, 201–203, 408, 414, 415, 431, 436, 477, 502, 503 and 624
The bill makes amendments to strengthen and rationalise the definitions of “associated persons” in the Income Tax Act 2007.
The definitions are mainly used in an anti-avoidance capacity to counter non-arm’s length transactions that could undermine the intent of the income tax legislation. The changes are consistent with a key theme of the government’s tax policy work programme, which is ensuring that the income tax system is robust. This is supported by the high priority that protection of the tax base has in the current economic and fiscal environment.
There are currently a number of major weaknesses in the definitions, in particular, those applying to land sales. These weaknesses pose a risk to the tax base which the bill addresses by introducing a number of amendments to the income tax legislation. The main changes:
- deal with the weaknesses in the current definitions in relation to trusts. In particular, there will be new tests focussing on a trust’s settlor (that is, the person who provides the trust property);
- provide more robust rules aggregating the interests of associates to prevent the tests for associating two companies and a company and an individual being circumvented by the fragmentation of interests among close associates; and
- implement a tripartite test associating two persons if they are each associated with the same third person, thereby making the associated persons tests as a whole more difficult to circumvent.
The bill also rationalises the current income tax definition of associated persons and other income tax provisions that employ a similar concept, such as the definition of “related persons” in the dividend rules. This represents a significant simplification and makes the associated persons concept in the Income Tax Act more coherent.
Twenty-six submissions were received on the associated persons proposals in the bill. Submissions were opposed to the proposals in the bill. Officials have worked with those who made submissions on recommending refinements to the new associated persons definitions in the bill to prevent any overreach while still addressing weaknesses in the current definitions that, for example, allow property developers to escape tax by operating through closely connected entities.
The refinements to the bill will, for example, ensure that energy consumer trusts will not be associated with members of the public as a result of the reforms. This report explains why people cannot be associated through community trusts. It is not the policy intent for such trusts that have a public nature or their beneficiaries to be adversely affected by the reforms. The tripartite test has been narrowed to address concerns that it could apply more widely than is necessary to protect the tax base. To reduce uncertainty, officials recommend not proceeding with the changes to the dividend and fringe benefit tax rules.
A number of submissions have criticised the current legislative policy that land dealers, developers and builders are generally taxed on all their land sales and cannot claim to hold non-taxable investment property portfolios. It is not envisaged that this policy on land sale gains will be narrowed. The changes in the bill would mean that the policy is properly achieved by closing some gaps in the current law.
Officials note that the reforms are not all “one-way” and some current tests have been narrowed in the bill. For example, the ambit of the “relatives” test has been reduced from four to two degrees of blood relationship to reduce compliance costs. The “habitually acting in concert” test has also been removed to improve certainty.
The application date changes that the Minister of Revenue has asked the Committee to consider will ensure that the associated persons reforms will not have any retrospective application. The changes mean that the reforms will generally apply for the 2010–11 and subsequent income years. However, for the purposes of the land provisions, the reforms will generally apply to land acquired on or after the date of enactment.