"Associated persons" definition - power of appointment or removal test

2013 amendment ensures that a trustee is not associated with a person who holds the power of appointment or removal of that trustee in their professional capacity.

Section YB 11 of the Income Tax Act 2007

The amendment to section YB 11 of the Income Tax Act 2007 ensures that a trustee is not associated with a person who holds the power of appointment or removal of that trustee in their professional capacity.

Background

Section YB 11 treats a trustee of a trust and a person who has a power of appointment or removal of that trustee as associated persons. This section is intended to supplement the trustee-settlor associated persons test in section YB 8 - that is, to treat a person who has the power to appoint or remove trustees similar to a settlor of a trust who usually retains the power.

Before the amendment, section YB 11 could include the relationship between professional advisors and their clients. This outcome was not intended as professional advisors hold any power in their professional capacity only and would typically not benefit under the trust. Also, this outcome was inconsistent with the existing exclusion of professional advisors from the definition of "settlor".1

Key features

Section YB 11 has been amended to ensure that a trustee is not associated with a person who holds the power of appointment or removal of that trustee in their professional capacity if the person meets all of the following criteria:

  • the person holds the power as a provider of professional services;
  • the person is a member of an approved organisation, as that term is defined in section 3(1) of the Tax Administration Act 1994, for such providers of professional services; and
  • the person has not benefited from the trust and is not eligible to benefit from the trust.

Current approved organisations under the Tax Administration Act 1994 are the New Zealand Institute of Chartered Accountants, New Zealand Law Society, and the Society of Trust and Estate Practitioners.

Application date

The application date for this amendment is the same as the date when the current associated persons definition came into force.

The general application date for the amendment (excluding those applying for the land provisions) is the 2010-11 income year.

For the purposes of the land provisions (as defined in section YA 1) other than section CB 11 (which relates to disposal of land within 10 years of completing improvements), the amendment applies to land acquired on or after 6 October 2009.

For the purpose of section CB 11, the amendment applies to land on which improvements began on or after 6 October 2009.

1Currently, when a professional advisor assists in establishing a trust by settling a nominal sum on trust on behalf of someone, they are not the real settlor of the trust but are only an intermediary or facilitator. The real settlor is the person who the professional advisor acted for in making the settlement. The existing nominee rule in section YB 21 treats a person whom the professional advisors acted for as the settlor rather than the professional advisor.