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Associated Persons Rules The association rules apply to the relationship between land dealers, real estate developers or builders, and other business entities involved in buying and holding property. The rules were put in place because of a concern that associated businesses would work together to buy a property for the express purpose of holding it and avoid the capital gains tax. An unexpected by-product of these rules is that professional advisors who are designated as appointors to an otherwise unrelated trust are considered an associated party. The appointors' assets, as well as those of his or her other clients, are also considered tainted under these rules. Taxation Remedial Bill: Section YB 11 What YB 11 states is that a trust is associated with its appointors. The association exists because of the tripartite test whereby an association exists between two parties where both share a common associate, such as a professional appointor. However, upon examining this test more closely, the common entity is not subject to the test tiwce. For instance, if a professional appointor for Trust A also holds the Power of Appointorship for Trust B, there is not an association between these trusts. This tripartite provision states that the common associate (the professional appointor) is associated to both trusts by means of the same test - and applying the same rule twice is not allowed by YB 14. The associated persons rule does not necessarily work as it should, however. It is possible under the current test for an appointor of a trust used for property investment to also be a shareholder in a development company or a settlor of another trust involved in property development. With the rules as they stand, this would allow the association. Of course, most appointors would be negligent if they accepted an appointorship to two such trusts or held stock in a related company. Should this situation come to light, the client's assets could be subject to a 30% capital gains tax when sold within a decade, as well as any assets acquired over the period of association. Even if there is not outright negligence proven, other situations, such as when a client begins the business of real estate development at some time during an association with the appointor without telling him or her, could also result in the same consequences. Until the new rules are further sorted out, it is advisable to be very careful when appointing a professional to manage a property investment trust.
Article Source: http://www.bharatbhasha.net Article Url: http://www.bharatbhasha.net/finance-and-business.php/240011 Article Added on Friday, June 11, 2010
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