Associated persons and person with a power of appointment or removal

Submission

(New Zealand Institute of Chartered Accountants)

A person with a power of appointment or of removal of a trustee should be exempt from association with the trustee under section YB 11 (Trustee and person with power of appointment or removal) if they are subject to the professional code of conduct and disciplinary processes of an approved organisation.

Section YB 11(1) of the Income Tax Act 2007 prescribes that a trustee of a trust and a person with the power of appointment or removal of trustees in relation to the same trust are associated for tax purposes.

An exclusion to this associated persons test was enacted by the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013.

Among other requirements, the exemption applies to a person who is a “member of an approved organisation”. To be an approved organisation, the organisation’s natural person members must be subject to a professional code of conduct and to disciplinary processes in accordance with that code (among other requirements).

There are circumstances in which this exemption does not operate as intended.

Using the New Zealand Institute of Chartered Accountants (NZICA) as an example of an approved organisation, chartered accountancy practices can have partners who are members of NZICA and partners who are not members. A partner in a CA practice who is not a member of NZICA is still subject to NZICA’s code of ethics and disciplinary processes because they are part of a member firm. However, because they are not a member of NZICA themselves, they are not currently covered by the exclusion in section YB 11(2).

It appears contrary to the policy for the exclusion that a partner who is not a member of NZICA but receives a power of appointment or removal of a trustee in their professional capacity is not covered by the exclusion.

Comment

Officials agree that the policy intention was to exclude from the association test those trustees acting in a professional capacity. The membership of a professional body was seen as an appropriate test as it ensured that those eligible for the exclusion would be limited and that a high standard would have to be met before the exclusion was available. Members of professional bodies such as the New Zealand Law Society and NZICA are the most likely trustees to be acting in a professional capacity. A non-member of NZICA working in a chartered accounting firm is as likely as an NZICA member to be a trustee in their professional capacity and should not be treated any differently for the purpose of the associated persons test. Therefore, the exemption should be extended to include not only members of an approved organisation, but also persons who are subject to the approved organisation’s code of ethics and disciplinary processes (provided the other requirements of the exclusion in section YB 11(2) are also met).

Recommendation

That the submission be accepted.