Tripartite test – scope

Submissions

(32 – KPMG, 39 – Russell McVeagh, 58 – nsaTax, 68A – Corporate Taxpayers Group, 70 – Deloitte)

The scope of the tripartite test in section YB 14 is too wide in its application, will give rise to unintended consequences and should not be enacted in its current form. For example, it could result in every beneficiary under an energy consumer trust being associated with each other in conjunction with the trustee for a relative test in section YB 5. These tests will likely be detrimental to the Crown revenue, at least in the short-term, with the declining property market.

In the context of land transactions, the exceptions contained in section YB 14(2) should be expanded to include section YB 5 (which relates to the association of a person and a trustee for a relative).

Comment

The tripartite test in the bill, which associates two persons if they are each associated with the same third person, currently contains a number of exceptions to ensure it does not apply more widely than is necessary to protect the tax base. For example, partners in a partnership will not be automatically associated under the tripartite test.

Officials consider that the scope of the tripartite test should be narrowed so that the test applies only to associate two persons if they are each associated with the same third person under different associated persons tests. This amendment would address a number of examples raised in submissions of where the tripartite test could apply more widely than is necessary to protect the tax base. The exceptions in the current section YB 14(2) could be largely subsumed by this modification to the tripartite test.

The tripartite test should also not apply if two persons are both associated with the same third person under any of the companies-related tests in sections YB 2 or YB 3. Currently, the exceptions in sections YB 14(2)(a) and (b) apply only if two persons are both associated with the same third person under the same companies-related tests – that is, persons A and B are both associated with person C under the two companies test in section YB 2, or are both associated with person C under the company and person other than a company test in section YB 3. The exceptions do not currently apply if person A is associated with person C under section YB 2 and person B is associated with person C under section YB 3 – the amendment proposed by officials would provide an exception to the tripartite test in this case.

In response to a submitter’s example involving an energy consumer trust, officials have separately recommended in this report that these trusts be excluded from the trustee and beneficiary test in section YB 6 and the person and trustee for relative test in section YB 5. In addition, officials have also recommended that the person and trustee for relative test not apply for the purposes of the land provisions.

Officials note that a submission’s reference to the reforms possibly reducing Crown revenue given the current declining property market does not take into account the application date of the associated persons reforms. In particular, the new associated persons definitions will generally apply only to land acquired on or after the date of enactment of this bill.

Recommendation

That the submissions be accepted, subject to officials’ comments.