QB 07/03
Issued
28 Jun 2007

Trustees in the context of the Goods and Services Tax Act 1985: does a separate trustee capacity and personal capacity exist and do separate trustee capacities exist for trustees of multiple trusts?

QB 07/03 discusses 'associated persons' and whether a person acting as a trustee of a trust is acting in a different capacity from that of personal capacity.

Goods and Services Tax Act 1985 ("GSTA"), section 2 - Definition of the term "trustee"

Background and question

We have been asked to clarify Inland Revenue's position on whether, in the context of the "associated persons" definition in section 2A(1) of the GSTA, a person acting in their capacity as a trustee of a trust is acting in a different capacity from when they are acting in their personal capacity. A related question is whether a person who is a trustee of more than one trust is to be regarded as possessing a separate trustee capacity for each particular trust.

The answer

For the purposes of the "associated persons" definition in section 2A(1) of the GSTA, a person acting in their capacity as trustee of a particular trust will be treated as acting in a different capacity from when they are acting in their personal capacity. A person who is a trustee of more than one trust is to be regarded as possessing a separate trustee capacity for each particular trust.

Legislation

Section 2A of the GSTA defines "associated persons" and provides that:

(1) In this Act, associated persons or persons associated with each other are-

(a) two companies if a group of persons-

(i) has voting interests in each of those companies of 50% or more when added together; or

(ii) has market value interests in each of those companies of 50% or more when added together and a market value circumstance exists in respect of either company; or

(iii) has control of each of those companies by any other means whatsoever:

(b) a company and a person other than a company if the person has-

(i) a voting interest in the company of 25% or more; or

(ii) a market value interest in the company of 25% or more and a market value circumstance exists in respect of the company:

(bb) a person, or a branch or division of the person that is treated as a separate person under section 56B, and another branch or division of the person that is treated as a separate person under section 56B

(c) two persons who are-

(i) connected by blood relationship:

(ii) connected by marriage, civil union or de facto relationship:

(iii) connected by adoption:

(cb) a trustee of a trust and another person (person A), if-

(i) person A is associated with another person (the relative) under paragraph (c); and

(ii) the relative is associated with the trustee under paragraph (f):

(d) a partnership and a partner in the partnership:

(e) a partnership and a person if the person is associated with a partner in the partnership:

(f) a trustee of a trust and a person who has benefited or is eligible to benefit under the trust, except if, in relation to a supply of goods and services-

(i) the trustee is a charitable or non-profit body with wholly or principally charitable, benevolent, philanthropic or cultural purposes; and

(ii) the supply is made in carrying out these purposes:

(g) a trustee of a trust and a settlor of the trust, except if the trustee is a charitable or non-profit body with wholly or principally charitable, benevolent, philanthropic or cultural purposes:

(h) a trustee of a trust and a trustee of another trust if the same person is a settlor of both trusts:

(i) a person (person A) and another person (person B) if-

(i) person B is associated with a third person (person C) under any one of paragraphs (a) to (h); and

(ii) person C is associated with person A under any one of paragraphs (a) to (h).

The "trustee" definition in section 2 of the GSTA provides that:

"Trustee" includes an executor and administrator; and includes Public Trust and the Maori Trustee.

The definition of "trustee" in section OB 1 of the Income Tax Act 2004 ("ITA 2004") provides that:

"trustee",-

(a) for a trust,-

(i) means the trustee only in the capacity of trustee of the trust; and

(ii) includes all trustees, for the time being, of the trust:

(b) includes an executor and administrator:

(c) includes Public Trust:

(d) includes the Maori Trustee:

(e) for a superannuation scheme that is a trust or that is treated by this Act as a trust, includes a person by whom the investments of the scheme (or a part of the scheme) are managed or controlled:

(f) for a unit trust, means the trustee in which is vested the money, investments, and other property that are for the time being subject to the trusts governing the unit trust:

(g) is defined in section DC 14 (Some definitions) for the purposes of sections DC 11 to DC 13 (which relate to share purchase schemes).

Analysis

The definition of "trustee" in the GSTA is an inclusive definition as it states that "trustee" includes an executor and administrator; and also includes Public Trust and the Maori Trustee. It therefore does not exhaustively list what is included in the "trustee" definition. By using an inclusive definition, Parliament must have intended to also rely on the common law meaning of "trustee".

Case law recognises that a person acting in their capacity as a trustee of a trust is acting in a different capacity from when they are acting in their personal capacity (Case K68 (1988) 10 NZTC 544; Case L72 (1989) 11 NZTC 1,419; Gasparini v Gasparini (1978) 87 DLR (3d) 282; 20 OR (2d) 113). Case law also recognises that a person's capacity as a trustee of a particular trust is separate from their capacity as a trustee of any other trust (Fraser v Murdoch (1880-81) LR 6 App Cas 855; Commissioner of Taxes v Trustees of Joseph (deceased) (1908) 2 NZLR 1085; 10 GLR 556; Case 98 (1951) 1 CTBR (NS) 423).

The definitions of "trustee" in the GSTA and the ITA 2004 differ in that the ITA 2004 definition specifically states that a reference to a "trustee" of a trust in the ITA 2004 means "the trustee only in the capacity as trustee of the trust". The GSTA is silent on this point. Prior to 1988, the GSTA and the Income Tax Act 1976 ("ITA 1976") had the same "trustee" definition. The current GSTA "trustee" definition is the definition that the two Acts originally shared.

The ITA 1976 definition of "trustee" was amended by the Income Tax Amendment Act (No 5) 1988 with application from 1 April 1988 to explicitly clarify that a reference in the ITA 1976 to a "trustee" of a trust meant that trustee only in their capacity as trustee of that trust. That approach is retained in the ITA 2004. The GSTA definition is different in that it does not contain an explicit reference to a separation between a person's capacity as trustee of a trust and their personal capacity. Therefore an issue arises as to whether the absence of this specific reference means that the separation between a person in their capacity as trustee of a trust and their personal capacity is recognised in the GSTA.

It is considered that the amendment was made to the ITA definition of "trustee" as a clarification exercise only. Although the GSTA definition of "trustee" was not amended to keep in step with the ITA definition, as noted above, it is considered that the inclusive nature of the GSTA definition means that the general principles relating to the status of trustees and their separate trustee and personal capacities are incorporated into the GSTA "trustee" definition.

Example

A is a trustee of a trust. A's wife (C) is a shareholder of a company, (B), and has a voting interest in the company of 25%. C is also a beneficiary of the trust. The trust sells property to the company. When determining the time of supply of the property under section 9(2)(a), a factor to consider is whether or not the parties are associated with each other. The question is whether the trust and the company are associated. To determine association, it is necessary to consider section 2A(1) which states:

2A(1) In this Act, associated persons or persons associated with each other are-

(a) two companies if a group of persons-

(i) has voting interests in each of those companies of 50% or more when added together; or

(ii) has market value interests in each of those companies of 50% or more when added together and a market value circumstance exists in respect of either company; or

(iii) has control of each of those companies by any other means whatsoever:

(b) a company and a person other than a company if the person has-

(i) a voting interest in the company of 25% or more; or

(ii) a market value interest in the company of 25% or more and a market value circumstance exists in respect of the company:

(bb) a person, or a branch or division of the person that is treated as a separate person under section 56B, and another branch or division of the person that is treated as a separate person under section 56B

(c) two persons who are-

(i) connected by blood relationship:

(ii) connected by marriage, civil union or de facto relationship:

(iii) connected by adoption:

(cb) a trustee of a trust and another person (person A), if-

(i) person A is associated with another person (the relative) under paragraph (c); and

(ii) the relative is associated with the trustee under paragraph (f):

(d) a partnership and a partner in the partnership:

(e) a partnership and a person if the person is associated with a partner in the partnership:

(f) a trustee of a trust and a person who has benefited or is eligible to benefit under the trust, except if, in relation to a supply of goods and services-

(i) the trustee is a charitable or non-profit body with wholly or principally charitable, benevolent, philanthropic or cultural purposes; and

(ii) the supply is made in carrying out these purposes:

(g) a trustee of a trust and a settlor of the trust, except if the trustee is a charitable or non-profit body with wholly or principally charitable, benevolent, philanthropic or cultural purposes:

(h) a trustee of a trust and a trustee of another trust if the same person is a settlor of both trusts:

(i) a person (person A) and another person (person B) if-

(i) person B is associated with a third person (person C) under any one of paragraphs (a) to (h); and

(ii) person C is associated with person A under any one of paragraphs (a) to (h).

Section 2A(1)(i) is a test for association in a tripartite situation such as this, and provides that two people will be associated under section 2A(1)(i) if they are each associated with a third person under any one of paragraphs (a) to (h), being the remaining paragraphs of section 2A(1). The trust (represented by A, the trustee) and the company will be associated under section 2A(1)(i) if they are each associated with a third person under any one of the remaining paragraphs of section 2A(1).

A's wife (C) holds a voting interest of 25% in the company (B). This means that C and B are associated by virtue of section 2A(1)(b)(i).

The issue to then be determined is whether A and A's wife (C) are associated. If they too are associated under any of the paragraphs (a) to (h) of section 2A(1), then the company and the trust will be associated persons.

Because A is a trustee of the trust, he is regarded as having two capacities, a trustee capacity and a separate personal capacity. In this case the transaction involves trust property being sold to the company, with A acting in his trustee capacity. Because A is viewed only in his capacity as trustee of a trust, there is no association between A and A's wife (C) under section 2A(1)(c)(ii), which associates two people through marriage. Consequently, the trust and the company cannot be associated through A's marriage to C. However, as C is a beneficiary of the trust, and is, therefore, associated with A under section 2A(1)(f), the trust and the company are associated.

Furthermore, in this scenario, it is worth noting that section 2A(4) results in A being treated as holding a 25% interest in company B.

[This item was issued by the Office of the Chief Tax Counsel on 28 June 2007. It was previously released for public consultation as exposure draft QB0050].