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Dastardly Duty may be Demolished

This blog considers the likely consequences if Gift Duty were to be abolished.  The Government has recently announced that such a move is being considered.  Every practitioner should be aware of this possible shift, as it is likely to have an impact on just about every individual they advise. The Government has said that a period of consultation will be undertaken, and if Gift Duty is to be abolished, the proposal will be contained in a Bill to be released in November 2010.

Does Gift Duty measure up as an effective tax?

Equity:It is often said that there is no equity – i.e. fairness – in tax, although that is one of Adam Smith’s guiding principles for a good tax.  Well, it could be argued that there is no equity in Gift Duty.  Persons do not pay this tax on the basis of ability to pay or their income level.  Rather, in my experience, the only situations that give rise to Gift Duty are where a taxpayer inadvertently stumbles into it.  There are apparently not too many of this type of situation, as only around $1.5m is collected in gift duty per annum.  Either that, or those who become liable to Gift Duty just ignore it.

Certainty: The tax is certain.  No tax is due where advice is taken.

Convenience: As most people structure out of the tax, it could be argued that it is a very convenient tax.  However, the structuring process may not be.

Efficiency: Gift Duty gets a big cross on this criterion.  If anyone could calculate the amount spent on deeds of reduction of debt across the country, it would surely come out more than $1.5m.  The tax costs more to administer than it collects.  One would have to ask whether there are other reasons for the tax, such as creditor protection or safeguarding the tax base or some social assistance measures like rest home care subsidies.  My answer to that is: why use Gift Duty to police these measures?  They should have good sanctions built into their own legislative framework, and should not rely on Gift Duty as a backstop.  It is a very expensive and inconvenient backstop.

Further, the thresholds have not been amended since 1984, and every year since then, Gift Duty has become more onerous to comply with.

What are the likely consequences of abolition?

1. Lawyers and accountants will no longer be required to do gifting (or at least, will only do one gift when required);

2. There may be a one-off meeting that you would have to have with all your trust clients to get them to gift all in one go;

3. Some of the reasons why trusts are set up will disappear. This is so because if Gift Duty is abolished, the Government has signalled that insolvency and social benefit issues will also be reviewed. This may be the Government taking the chance to tighten up on the rest home care subsidy issues. We have already had an informative discussion on that topic in an earlier blog (see John Peterson’s post on 23 March). In addition, I predict a downturn in new business for trust specialists.

4. When setting up a trust you won’t have to put a gift of all loans outstanding in your client’s will. So you may not need to even update the will when setting up a trust.

5. How would the accruals rules work? Currently certain exemptions are contained in the Gift Duty rules where the accruals rules and Gift Duty overlap. Would this need amending? Presumably not, as one would just pay income tax where Gift Duty was an issue previously.

6. There will be even fewer situations where the concept of “domicile” has an impact on any New Zealand tax liability, if any at all.  Domicile is important for deciding when Gift Duty applies.

7. Kiwis who are overseas will be able to settle all their hard earned overseas currency on an offshore trust before they come back to New Zealand.  This means that they may be able to get the foreign trust treatment for a greater amount of their income than before.

8. Would there be a flow of cash out of New Zealand?  There may be.  One situation is where a person wants to contribute a large amount to an offshore charity, or establish an offshore charity.  Currently, if that charity is not registered with the Charities Commission or the IRD, then the gift is not exempt from Gift Duty.  If Gift Duty is abolished, then that will no longer be an obstacle.  This would be very limited.

I can’t think of any other situations, but it is an area that would have to be carefully considered.

There are likely to be many more consequences of the abolition of Gift Duty.  If readers can think of any I have missed, I would be interested to hear about them.

Is it a good idea?

The abolition of Gift Duty would certainly be a step in the right direction.  It is likely to remove some dead wood from our tax legislation, and that would certainly add to the efficiency of our economy.

For other articles relating to New Zealand law refer to our firm’s New Zealand Lawyers blog.

2 Responses

Israel Porter on September 28, 2010 at 9:50 am

Hmmm, that would make NZ quite the tax haven, huh?

David Hayes on November 2, 2010 at 12:28 pm

And there may be relationship property issues. The gifting program during a relationship has been argued as an asset so if there is no gifting the asset may be safe. However given the Courts recent decisions regarding Trusts being ineffective to protect assets the situation may already be covered so that even if all assets are gifted away the retention of any degree of control over the trust assets (bundle of rights doctrine) will still render them liable to attack.

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