Money: GST bill and associated matters

By DENHAM MARTIN

The Taxation (Annual Rates, GST and Miscellaneous Provisions) bill signals a major revamp of the existing "associated persons" tests in the GST Act.

The move would widen the tests, making them closer to those used in income tax's international tax rules.

The associated persons test is important in the GST context for several reasons.

One of the most significant is that where a taxpayer makes a taxable supply to an associated person for less than market value - or for no consideration - the supply will be deemed to be made at market value if the recipient is not entitled to an input tax credit.

In that case, the supplier will be liable to account for the GST on the open market value of the supply, irrespective of having been paid nothing for it.

For example, a dentist who is registered for GST treats a sibling for free.

Unless the sibling acquired the services for the principal purpose of making taxable supplies, and is entitled to input tax deductions (which is unlikely unless the sibling is, for example, a model), the dentist must pay GST calculated on the open market value of the treatment.

In the main, the proposed changes would widen the test and make it easier to be caught as an associated person.

The most significant changes widening the test are:

Association as a "relative" will include people in a "relationship in the nature of marriage."

However, the legislation contains no indication of how this will be judged. For instance, would a relationship of short duration qualify?

The trustee of a trust will be an associate of a settlor of the trust (not just of the beneficiary as is the case now) and also an associate of a trustee of another trust if both share a common settlor.

A new tripartite test will treat as associates any two people who are each associates of a third person.

A new rule will aggregate the direct interests of a person in a company with the interests held by associates to determine whether two companies or a company and an individual are associated.

However, there is some good news for taxpayers.

Parts of the existing tests are being relaxed.

Association as a "relative" through blood relationship will drop from being within the fourth degree of relationship to being within the second degree. So cousins will be out, but siblings, parent-child, and grandparent-grandchild relationships will still be in.

The rule for determining whether a company and an individual are associated will move from a voting or market interest threshold of 10 per cent up to 25 per cent.

Though the bill will obviously give trustees food for thought, possibly the most troubling change is the introduction of the tripartite test.

Under that test, taxpayers could find themselves in associations that may surprise them - and with people who are complete strangers.

For example, a married woman will be associated to the settlor of a trust of which her brother-in-law is trustee, even though she has never met the trust settlor and has no knowledge of the trust.

The association would arise because both the woman and the trust settlor would be associates of the brother-in-law - the woman through connection by marriage under the "relative" test, and the settlor because the brother-in-law is a trustee of the settlor's trust.

Further examples are:

A partner in a 20-partner accounting firm begins living with a person, with the result that the de facto spouse will be associated with every partner of the partnership.

A trustee of Trust 1 will be associated with the beneficiaries of Trust 2 where both trusts were settled by the same settlor.

A trustee of Trust 1 will be associated to the (de facto) spouse of the trustee of Trust 2 where both trusts were settled by the same settlor.

Finally, with the tests now expected to become wider than the tests that are used for most income tax purposes, it is clear that any structuring of transactions by taxpayers to prevent an association arising will soon become even harder.

Of course, it may be that in many cases there will be no need to prevent an association for GST purposes.

However, in some cases this need may exist.

Assuming that the bill will be passed into law in its present form, the task is about to become more difficult.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.