News

Expansion of Associated Persons Rules

Date: 26/03/2010

Now what follows is fairly detailed. But given the fact that so many of us have investments in property, it is worth covering this in the most thorough manner possible. So here goes...

Until the 2009 legislation, it was reasonably easy to hold land in entities that were not associated with land dealers, land developers or builders, and in doing so, ensure that any future profit on the sale of that land was not likely to be taxable. This most recent legislation passed by the Government greatly expands the “associated persons” rules. The intent of the new legislation is that property dealers, developers, builders, and their associates are generally taxed on all gains on property sold within 10 years of acquisition.

Given the clear intent of the rules, a structure that appears to deliberately circumvent the new rules may be viewed by the IRD as a tax avoidance arrangement – something worth being mindful of.

However, gains from the sale of land may not necessarily be taxable even though a person is tainted by association. Generally, if a person holds land for more than ten years, any profit on its sale should not be taxable. If a person is associated to a builder, the land will be taxable on sale only if it is sold within ten years of improvements being completed. If no improvements are made, the land will not be subject to tax on sale if sold within ten years.

In order for an entity to taint a person, that entity must be in the business of developing or dealing in land - when the land was acquired by the person. An entity in the business of erecting buildings will taint a person if the person commences building improvements on land while associated with the builder. Whether an activity amounts to a business is a question of fact based on case law.

Yet there are exemptions to the land taxing provisions to provide relief in specific scenarios. If a property is used by a taxpayer principally as a place of residence then any gain on its sale should not be taxable. In certain scenarios whether the exemption applies will be unclear, for example, where a property has been used as both a residence and to derive income (such as rental income). There is also an exemption for land used as business premises.

With the tightening of the associated person’s rules, more land sales will be subject to tax. Application of the exemptions will need to be considered on a case by case basis. Given that the land taxing provisions are now more wide ranging, disputes with the IRD about the application of the new rules and possible exemptions are more likely to occur. In view of this, careful consideration should be given when deciding how a land transaction should be treated. Again, we can assist here.