Exceptions to the associated persons rule
The bill proposes an exception to the proposed associated persons rule when there is a genuine inter-generational transfer of an ownership interest in livestock to children or grandchildren. The suggested grounds for this are very limited, and essentially require the children or grandchildren to have no direct or indirect ownership interest in the livestock before the transfer and the parents or grandparents to have no direct or indirect ownership interest in the livestock after the transfer. This is to ensure that the inter-generational transfer is genuine.
Submission
(New Zealand Institute of Chartered Accountants)
NZICA supports the concept of this exception.
Recommendation
Noted.
Submission
(New Zealand Institute of Chartered Accountants)
The exception should be extended to beneficiaries of a trust (whether the trust owns the livestock directly or indirectly) where they only have a beneficial interest in the trust.
Comment
Given the modern discretionary trust, a “beneficial interest” could amount to almost all the privileges of ownership (for example, receipt of all the farming income). In this case it is not viable to suggest that the beneficiary is not already, at least economically, an owner of the livestock.
Further, it would be very difficult to distinguish this “full ownership” beneficial interest from beneficial interests that were considerably less than this. Further, from a tax policy perspective, this seems inappropriate – if the children or grandchildren have an direct or indirect interest in the income from the sale of livestock then they have, at least in an economic sense, an interest in the livestock.
Recommendation
That the submission be declined.
Submission
(New Zealand Institute of Chartered Accountants)
The exception should be extended to situations when the children or grandchildren receive their direct or indirect interest in livestock by way of a testamentary bequest.
Comment
When the older generation has ceased farming and the younger generation has begun farming as a result of the death of the famer the policy parameters for inter-generational relief apply. The present drafting of this relief does not look beyond the testamentary trust in deciding association and therefore “tainting”. Thus, as the bill was introduced, relief would not be available.
Recommendation
That the submission be accepted.
Submission
(WHK)
Inland Revenue should be given a discretion in determining which associated persons’ transactions the exception applies to.
Comment
In the last 10 years Parliament has removed most of the discretions that used to apply. In their place the legislation has been amended to provide more certainty. Inland Revenue would not have the resources to review applications on a taxpayer-by-taxpayer basis.
Recommendation
That the submission be declined.
Submission
(New Zealand Institute of Chartered Accountants)
The farming structure should not dictate whether or not the exemption applies.
Comment
We have discussed this with NZICA and they now agree that this submission has been addressed.
Recommendation
That the submission be noted.
Submission
(Ernst & Young)
The definition of “associated persons” should be revisited as it seems that siblings of either generation, or grandparents, who are operating independently could “taint” the transaction and inappropriately limit the conceptually correct application of the exception.
Comment
Officials agree that associated party farmers that are completely independent could limit the application of the exception. This would further and inappropriately limit what is already, by intent, a relatively narrow exception.
Recommendation
That the submission be accepted.
Submission
(New Zealand Institute of Chartered Accountants, WHK)
Use of the term “in the ordinary course of business” as a limitation to the more general associated persons rule should be clarified.
Comment
WHK submits that the bill should be amended to provide further clarity. We have discussed this issue with the other submitter, NZICA, which agrees that any clarification should be by way of example in the Tax Information Bulletin. The Tax Information Bulletin is published by Inland Revenue when the legislation is enacted.
Recommendation
That the submission be accepted, and an example be provided in the relevant Tax Information Bulletin.
Submission
(Matter raised by officials)
The limitation that requires the vendor to cease deriving income from specified livestock should be marginally widened.
Comment
The concern is that the vendor might retire to a lifestyle block and keep a few animals. This should not disqualify the parties from accessing the exception to the associated persons rule. An amendment to insert a business requirement into the cessation rule would address this.
Recommendation
That the submission be accepted.