The High Court decisions, Concepts 124 Ltd v Commissioner of Inland Revenue  NZHC 2140 and Staithes Drive Development Ltd v Commissioner of Inland Revenue  NZHC 2593 have resulted in uncertainty surrounding the application of the voting interest test for corporate trustees . See Corporate Trustee Associated for GST purposes
In both cases, the High Court held that the voting interests in companies were held by the legal owner of shares without reference to the capacity in which those shares were held. Consequently voting rights attached to shares owned by a corporate trustee were attributed to that trustee’s natural person shareholders in their personal, rather than trustee, capacity.
It has been considered that this approach overextended the application of the associated person rules and a legislative amendment was signalled.
The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (the Bill), which was introduced on 6 April 2017 proposes to introduce a general rule into Part Y of the Income Tax Act 2007 to distinguish between a trustee’s personal or body corporate capacity, and their separate trustee capacity.
The need for the amendment was explained in the Commentary to the Bill by the following example:
“[I]f a solicitor holds shares in a trustee company, which in turn holds shares in a number of unrelated client companies on trust for unrelated beneficiaries, the otherwise unrelated client companies would be associated for tax purposes (see Table 1). This could also be the case for other trustee companies that hold shares in companies for otherwise unrelated trusts.
While the High Court’s decision resulted in the correct outcome in these cases (that the companies were associated), the approach is inconsistent with the stated policy intention, which is that corporate trustees should be treated as ultimate shareholders and not looked-through.
The key changes proposed in the Bill regarding capacity are:
Income Tax Act 2007
- The introduction of a general rule in a new section YA 5 will provide the core rule to distinguish between a trustee’s personal, body corporate, or other capacity, and their separate trustee capacity. This proposed amendment will clarify that when a person is acting in the capacity of trustee of a trust, they are treated, for income tax purposes, as acting in that capacity and not in their personal, body corporate, or other capacities. Note that this may need to be practically differentiated from the general rule for trust law purposes a trustee acts personally and separate capacities are not recognised
- An amendment to the “company” definition in section YA 1 excluding a company acting in its capacity as trustee. This will mean that if a company is acting in its capacity as corporate trustee, it will be treated, for tax purposes, as a trustee (and not a company). As a consequence a corporate trustees would not be able to apply the automatic interest deduction for companies in section DB 7. Like other non-corporates, they will need to satisfy the general permission to claim a deduction for interest expenditure under section DB 6.
- An amendment to the “natural person” definition in section YA 1 excluding a natural person acting in their capacity as trustee. This would mean that if a natural person is acting in their capacity as natural person trustee, they will be treated, for tax purposes, as a trustee (and not a natural person).A number of consequential amendments of a rationalising nature resulting from the general trustee capacity amendment.
- An amendment to the “close company” definition in section YA 1 to allow trustees to continue to qualify as shareholders of a close company.
- An amendment to section HD 15 (asset stripping of companies) to ensure the provision applies to a company that is acting in the capacity of trustee.
- An amendment to the residence rules in sections YD 1 and YD 2 to ensure that the residence rules for natural persons and companies continue to apply to these persons acting in the capacity of trustee.
Tax Administration Act 2007
- Introducing a new definition of “natural person” to exclude a natural person acting in their capacity as trustee except for the purposes of the definition of qualifying resident foreign trustee and the serious hardship provisions in sections 177 and 177A.
Goods and Services Tax Act 1985
- The introduction of a provision into the GST associated person definition to associate a trustee and a person with the power to appoint or remove that trustee.
The amendment proposed will clarify that:
- any reference to “company” in the Income Tax Act does not include a corporate trustee (subject to any identified exceptions); and
- any reference to “natural person” in the Income Tax Act does not include a natural person trustee (subject to any identified exceptions).
There will be some specific exemptions to ensure no unintended policy change.