Gift Duty is one of the oldest taxes in New Zealand, which is being abolished from October 1, 2011, if the legislation to this effect is passed in Parliament.
It was introduced in 1885 in order to protect estate duty by discouraging people from giving away their assets before they died.
Estate duty was levied on the property or assets, which someone left to their heirs.
Both these forms of taxes helped Government to collect substantial revenue.
Gift duty is applicable in New Zealand on (1) gifts of property in New Zealand and (2) gifts of property outside New Zealand with the donor domiciled in New Zealand or the donor is a body corporate incorporated in New Zealand.
Gift duty applies when the total value of gifts a person makes in a 12-month period exceeds $27,000.
There are some exemptions, such as gifts to charitable organisations and small gifts to family members, considered part of normal expenditure.
The exemption threshold of $27,000 was set in 1984 and is not inflation-adjusted.
The gift duty starts at 5% and moves up progressively to 25%. The donor must file a Gift Duty Return with the Inland Revenue Department (IRD), if the amount exceeds $12,000. Almost 99.6% of the donors file a ‘Nil Gift Duty Return.’
Typically, the method of circumventing the gift duty is to sell the asset to the Family Trust in return for an interest free loan back to the settlers of the Family Trust.
That debt is then progressively forgiven by gifting only $27,000 per person per annum, using ‘Marshall Clauses’ (interest payable on demand), leaving the remaining debt to be gifted after death through a Will.
Thus, the use of gifting programmes ensures that no gift duty is paid in most situations.
Filing these statements and returns increases the compliance cost.
It is estimated that about 225,000 donors file GST Returns each year. Of these, only 0.4% are liable for payment and is often a result of the timing mistake of the donor.
Lawyers and accountants earn about $70 million from these clients as fees. Their normal charges are about $300 to prepare annual deeds of forgiveness and a Gift Duty Return with the IRD.
These figures indicate the ease with which gift duty can be avoided through Systematic Gifting Programmes.
The following table indicates the gross revenue generated through gift duty during the last seven years:
Gift duty collected
The above table shows that the revenue from Gift duty is coming down every year. But the cost of administering this tax is almost half of the revenue raised.
Abolishing Gift duty will remove a significant compliance cost.
Estate duty was abolished in 1992, but gift duty was retained until the issues such as income tax avoidance and social assistance were resolved.
The Government at that time felt that retaining the gift duty would prevent people from giving away large assets, which would undermine the interests of the creditors, reduce the income tax liability and enable easy access to social assistance.
However, it has had flow-on effects on creditor protection, tax avoidance and the provision of social assistance, including rest home subsidies.
The Government believes that measures are already in place to deal with these matters.
The Government agencies involved had wide investigative powers that were hardly invoked, since Gift duty was used as a backstop.
With the proposed abolition of gift duty, these agencies can stretch back to two, five, 10 or even 20 years and decide if a gift was part of a plan to strip the assets owned to a level at which social assistance would become admissible.
Further, alignment of the top personal income tax rate with the Trustee income tax rate that was announced in the May 2010 Budget would significantly minimise the motivation to reduce the tax obligations through gifting to family trusts.
There are sufficient provisions in the Insolvency Act and other legislations to safeguard creditors. Similarly, the Health Ministry is confident that it could prevent access to the residential care subsidy in the case of people deliberately depriving and divesting themselves of assets for this benefit.
The Government agencies will monitor the impact of the abolition of gift duty and undertake a post implementation review to ensure there are no unintended effects.
Abolition of gift duty would certainly be helpful in the case of farm succession, enabling the entry of another generation of farmers. The farming community would therefore welcome the move.
Some lawyers and accountants believe that gifting programmes should continue until the legislation is passed, enabling them to check and confirm that there are no inadvertent gifts or mistakes done prior to the abolition of Gift duty.
The gifting programmes provide a good opportunity to review the trust affairs and ensure that everything is in good condition. However, taxpayers should seek guidance in this respect from their accountants and lawyers.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland. The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.