Johnston Lawrence

Planning on a Company Restructuring: Do it now!

2 November 2008. by NZ Law Releases , tagged with Business Law | NZ LAW Releases

The June 2008 issue of Commercial eSpeaking contained an article about proposed changes to the definition of ‘associated persons’ and how that relates to taxation issues for land transactions. The proposed change of the ‘associated persons’ definition has far broader implications than just land transactions. This article highlights a number of issues that the expanded definition will have on timing for re-structuring companies.

Although the proposed changes to the associated persons regime have received considerable publicity in respect of their impact on land dealers, developers and builders, less publicised but equally significant is the proposal to replace the relatively narrow definition of ‘related person’ in the dividend rules with the wider ‘associated persons’ definitions.

Under the dividend rules, a company can distribute capital gains tax free in the course of liquidation. The definition of capital gain excludes capital gains realised in a transaction with a ‘related person’, except where the company is a close company and the gain is realised in a transaction with a related person other than a company in the course of liquidation. A related person gain is potentially taxable as dividend on liquidation.

The present definition of related person is relatively narrow and therefore easy to structure a non-related purchasing entity to avoid a potential dividend problem.

It is proposed that the new definition of associated persons will replace the related person definition for the 2009/10 and later income years which means from 1 April 2009 for most taxpayers.

Given the wide-reaching impact of the associated persons rules, it will be virtually impossible to break the definition in a group context owing to the introduction of an aggregation rule deeming a person to hold interests in a company held by associated persons and a tri-partite test which provides that if A is associated with B and B is associated with C, then A and C are associated.

Although it may be possible to deal with the related person issue under the Qualifying Companies regime, this can often require lead-in time if the vendor company is not already in the regime or it could result in capital gains being distributed to trust beneficiaries which may not be desirable from an estate planning or asset protection perspective.

Where companies are looking to restructure and that restructure will involve the sale of capital assets to potentially related persons at a gain, we strongly recommend that the restructure be tackled now under the existing narrow related person definition to avoid a lot of headaches.

Common situations where related person capital gains could arise include:

• Company A and Company B (unrelated) merge by selling their businesses at market value to Newco which is owned 50% each by Company A and Company B or their shareholders.
• Company C sells its business to Company D in return for cash and a 25% shareholding in Company D.
• Company X owned by Mum and Dad or their trust sells its business to Company Y owned by their son or his trust.
• Company Z owned by an individual sells a building to a trust which includes relatives of the individual within its beneficiaries.

We can currently break the related person definition in the above scenarios but will not be able to once the proposed changes take effect, so act now!

This article was written by Graeme Carruthers of tax specialists, nsaTax which focuses on assisting lawyers and accountants on solving tax and related commercial problems. Graeme is a director of nsaTax and deals with all areas of taxation including offshore investments, domestic and cross border structures, tax residency, land transactions and complex GST issues. He is a member of the New Zealand Institute of Chartered Accountants and has more than 20 years taxation experience.

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