Tax - Associated Persons’ Rules [Sept 08]

Keith Turner and Philip Bell are tax directors at nsaTax Limited, a chartered accountancy firm specialising in taxation.

Tax Implications Arising from Proposed Changes to the Associated Person Rules

Proposed Changes

The proposed changes introduce an aggregation rule and a robust tripartite test which, when combined, make it difficult to operate a valid non associated development and investment structure.

Essentially, from 1 April 2009 it will not be possible for dealers or developers to acquire investment properties and avoid paying tax on disposal of these properties unless they are held for ten years.

Further, the changes will prevent dealers and developers from selecting particular sites or units for transfer to a non associated entity to hold long term on capital account.  The inability to break association will mean such properties are taxable whenever sold, even if after ten years.  Dealers and developers should, therefore, identify development properties they may wish to retain, and consider transferring them to non associated entities before 1 April 2009.  This effectively crystallises the tax position, which could well create a tax loss available for offset given the current property market.  GST will be a consideration but is usually manageable.
 
Any proposed purchases of investment properties should be made by non associated entities before 1 April 2009 to ensure they are not subject to the ten year rule.  Whilst the investment entity will be tainted post 31 March 2009, tainting will only apply to acquisitions post 31 March 2009, not properties acquired prior to that date.

The proposed changes also amend the definition of "related persons" as they apply to distributions of capital gains by companies.  Such distributions can be reclassified as a taxable dividend.  An example of this is where a company sells a property or its business for a capital gain to a related person.  The gain arises due to the requirement to transfer assets at market value.  Such a gain is a "related party capital gain" and taxable on distribution to shareholders.  It is not overly onerous to break the related party definition at present but it will not be so manageable post 31 March 2009.  Therefore, current structures involving close companies should be reviewed and if it is desirable to transfer an asset (which could include shares in a company, or tangible assets) this should be done before 1 April 2009.

There is a limited window of opportunity – specialist taxation, legal and valuation advice should be sought in relation to any proposed transaction.

The contents of this newsletter are of a general nature only. While the information is believed to be correct no responsibility is accepted for its accuracy. Readers are advised to establish the applicability of information in relation to specific circumstances and not to rely solely on the text of this newsletter.

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