"Cup of tea" needed on key tax change

By Pattrick Smellie

Wednesday 11th March 2009

Major accounting firms are calling for delay to a fundamental tax change which would make whole communities liable for tax if they benefited from a community trust, among other major unintended consequences.

The finance and expenditure select committee heard submissions today from peak accounting and corporate tax experts on the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill, introduced during the last Parliament and delayed by the election.

Accounting firms PWC and KPMG, and the Institute of Chartered Accountants all called either for delayed implementation, or the abandonment of the proposed changes to the "associated person" rules because of their potential to create chaos among ordinary taxpayers.

While Revenue Minister Peter Dunne has signalled willingness to postpone implementation dates, the FEC is nonetheless under pressure to get its deliberations finished, and allocated just 15 minutes apiece for yesterday's submissions, which also covered major changes to the international tax and life insurance regimes, as well as meal allowance deductibility.

Most of the expert advisers and lobbyists for a who's who of the New Zealand finance and corporate sectors expressed alarm at the proposed changes.

The new rules are intended to deal with property owners splitting income between passive and active investments to avoid tax.

However, their more likely effect would be to drive up business for lawyers and tax advisers for people whom the changes were meant to catch, while making potentially large chunks of the population liable for tax they didn't even know about, said KPMG in its submission.

The Institute cited numerous nonsensical outcomes from the new rules as currently drafted. For example, borrowing a company-owned trailer from a neighbour would trigger a fringe benefit tax liability on the borrower.

More significantly: "The aggregator rule means that you are associated with a company, even if you don't own shares in that company," said the Institute.

Beneficiaries of community trusts could find themselves associated persons for tax purposes and liable for tax on the "dividend" derived from a trust's activities.

"We need much greater clarity on where the associated persons rules start and end," the Institute said. "We're not submitting that they go altogether, but that they could more of an avoidance flavour."

The current rules had been in place since 1973, were very widely applied and understood by non-expert taxpayers, and should be reviewed carefully.

While the proposed rule changes intended to strike at taxing property developers appropriately, the associated person rules permeated all parts of the Income Tax Act, the Institute said.

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