Rationalisation of other provisions

Issue: Replacing the company control definition

Submission

(53 – Ernst & Young)

There needs to be further review and amendment of provisions in the Income Tax Act 2007 which refer to “control” or related words, particularly in relation to the subpart FE thin capitalisation rules.

Comment

As a rationalisation measure, the bill repeals section YC 1, which defines when a company is treated as being under the control of any persons – its function will be performed by the new associated persons definition.

Officials do not agree that the repeal of section YC 1 creates any additional uncertainty over the meaning of “control by any other means”. This is because section YC 1 does not define “control by any other means”. The new associated persons definition and other provisions in the Act, such as the thin capitalisation rules, continue to use the “control by any other means” wording which is not defined in the Act. Therefore, the meaning of this wording is left to be determined by common law concepts.

Officials note that there is a reasonable body of case law on the meaning of “control” in the company context, such as the House of Lords decision in British American Tobacco Company Ltd v IRC [1943] AC 335. This body of case law provides guidance on the “control by any other means” wording.

Recommendation

That the submission be declined.

Issue: Replacing the related person definition

Submissions

(15 – WHK Taylors, 32 – KPMG, 35 – PricewaterhouseCoopers, 47 – Grant Thornton, 57 – Tomlinson Paull, 58 – nsaTax, 67 – New Zealand Institute of Chartered Accountants)

The related person definition should not be replaced with the new associated persons definition. Alternatively, the related persons rules in section CD 44(11) to (17) should be repealed.

The aggregation rule in current section CD 44(16) should be retained because the related party capital gains provisions were not intended to apply to capital gains made with the adult children or other close relatives of the shareholders in the vendor company.

The modifications in the associated persons definition that apply for the purposes of the land provisions should also apply for the purposes of the capital gains exclusions in section CD 44.

Comment

The bill proposes to replace the related person definition in section CD 44(15) to (17) with the new associated persons definition. The two definitions are conceptually similar, and the function of the related person definition can be performed by the new associated persons definition. Replacing the related person definition with the new associated persons definition is also a worthwhile simplification measure.

The current related person rules are used to determine the amount of the capital gain exclusion from a dividend arising from the realisation of a capital asset in the course of a company’s liquidation. It is outside the scope of the associated persons reforms to consider the removal of this feature of the dividend rules.

The advantage of rationalising provisions which embody an associated persons concept, such as the related persons definition in the dividend rules, cannot be fully realised if there is no change to the current scope of those rules such as the aggregation rule in section CD 44(16). Officials note that the aggregation rule in section CD 44(16) is not limited to infant children as is the case in the land provisions.

Official do not consider that the modifications in the associated persons definition that apply for the purposes of the land provisions should also apply to section CD 44. This is because the transactions that give rise to capital gains could relate to property other than land.

Recommendation

That the submissions be declined.

Issue: Scope of counted associate amendment

Submission

(32 – KPMG)

The “counted associate” definition in section CD 22(9) should be modelled on the land sale rules.

Comment

The amendment in clause 12 of the bill to the counted associate definition in section CD 22(9) is limited to making that provision’s description of discretionary beneficiaries consistent with other references in the Act. The submission’s reference to where the shareholder is a company relates to a current feature of the “counted associate” definition which is not being amended by this bill.

Recommendation

That the submission be declined.