Tax changes target property developers

Property developers (including dealers and builders) need to be alert to major tax changes passed by Parliament last night (Thursday 17 September). They will become law as soon as they receive royal assent.

Geordie Hooft, the taxation partner of Grant Thornton’s Christchurch office, says the changes will mean that property developers, and those associated with them, will face much greater exposure to tax.

“If you sell a property within 10 years you will be exposed to tax on any profit if you are associated with a property developer,” he said.

The main change made is the significant broadening of the definition of associated persons.”

“As a result, two key things need to be kept in mind. Firstly, it can no longer be assumed that current structures will continue to provide adequate protection from unintended tax consequences. Secondly, it will be increasingly important to carry out a reasonable level of due diligence before entering into joint ventures – be they business or personal in nature.”

Mr Hooft says that becoming associated for tax purposes is a bit like catching swine flu. “It passes from person to person and you have to take precautions to make sure you don’t get infected.”

Examples of the changes include new tests that associate two trusts, a settlor and a trust and an “aggregation rule” that broadens existing tests that associate two companies and a person and a company.

Of perhaps the greatest impact is a ‘tripartite’ test, which connects two people through their association with a third party in common. “If Person A is associated with Person B, and Person B is associated with Person C, then Person A and Person C will be associated with each other,” said Mr Hooft.

“It is ironic that these changes are being implemented at a time that some Government representatives are expressing reluctance about introducing a capital gains tax. The effect of the changes is to broaden the scope of the application of tax to what are considered to be capital profits.”

The changes will affect any land acquired from the date the law is enacted and in some circumstances will affect land which is already held and is subject to improvements where those improvements commence from the date the law is enacted.

Employers will also face changes, with clarification of the rules concerning relocation allowances and over-time meal allowances. Employers will also be responsible for administering amendments to charitable donation rebates, which will be able to be made on a “real time” basis through the PAYE system.

Other amendments in the tax bill include wholesale reform of controlled foreign company regime, new tax rules for the life insurance and petroleum mining industries.

For further information contact:

Geordie Hooft
T (03) 379 9580
M (021) 670 330
E geordie.hooft@nz.gt.com