More on tax issues re the Glenn donation

July 25th, 2008 at 11:00 am by David Farrar

I blogged on Tuesday some expert opinion on the issues around ’s donations. I discovered a surprisingly high number of lawyers read this blog and many of them contributed to the thread. Many suggested the gift duty was dependent on whether was a NZ tax domicile.

Mark Keating, who was quoted in the Herald also, has sent me a response to the comments:

I quote sections of the Estate & Gift Duty Act 1968 to establish that, regardless of the residence of the donor, the money is still subject to gift duty.

First, the definition of “gift” in s 2 is:”any disposition of property, whereever and howsoever made”.

That is pretty wide you will agree!

Second, that general definition in s 2 is further expanded upon to include a whole range of transactions where 1 party gives / receives more than the other (ie, any bargain that is intended to be unequal is effectively treated as a gift – so I cannot sell my house to you for $10 and say “that is just our contract”.  If the bargain is unequal, then it will be considered a gift under the Act).  The list of those examples of what kind of transactions can be gifts is, not surprisingly, very long … but it specifically includes:

” the payment, release, discharge, surrender, forfeiture or abandonment of any debt”.

So beyond any doubt (as you would expect) the payment by Owen Glenn of $100k of Peters’ legal fees is a “gift”.

But the residence issue is dealt with elsewhere, in s 63(1).  It specifically says a gift is subject to gift duty if it is made by a person who is domiciled in NZ (category 1, which will not apply here) or (category 2):

“all property situated in NZ, comprised in any gift made by any donor to any donee, where the donor is domiciled OUT OF NZ at the date of the gift” (my emphasis).

So it DOES catch donations made by persons who are not domiciled in NZ, provided “the property is situated in NZ”.  In those cases, the residence of the donor is irrellevant.  The people who made comments have only identified category 1, and ignored category 2 gifts.

So you have to determine IF the property “is situated in NZ”.  That is determined by s 63(2), which lists when (and when not) property is “situated in NZ”.  Again, it includes a very long list of things that are caught and things that are not.  But within that list is included:

“(e) a debt owed by a person … is treated as property situated in NZ if any of the debtors are resident in NZ”.

So:
(1) the debt was WP’s personal legal bill, and
(2) WP is resident in NZ, then
= the debt is treated as property situated in NZ = so gift duty is payable upon that debt.

And I have to say, that is the LOGICAL result.  Would your commentators really expect that $100k given to pay a NZers debts in NZ is not subject to Gift Duty.  I mean,  come on (!) – are a bit smarter than that!!!  To have this kind of donation excluded would be a MASSIVE loophole in the Act.

So you can confidently respond to those who have made comments that the residence of Glenn IS irrelevant.  The legal debt owed by WP (who is a NZ resident) is sufficient to mean the gift is subject to NZ Gift Duty.

I am not a tax lawyer of course but Mark’s comments seem very strong to me.

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19 Responses to “More on tax issues re the Glenn donation”

  1. Chris Diack (723 comments) says:

    Mmmm the debt relief isn’t the gift the money is. The debt was not owed to Glenn as creditor but by Peters to the Instructing Solicitor/Henry. Technically nothing to do with Glenn there is no creditor – debtor relationship.

    If Glenn had forgiven a debt owed to him by Peters then because Peters is resident in New Zealand gift duty would attach despite the fact that Glenn is resident overseas.

    S63(2)(e) Estate and Gift Duties Act 1968 is aimed at situations where the giftor is a creditor and forgives a debt or debts to NZ resident debtors. Under the provision the test is the residence of the debtor not the location of the debt.

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  2. Chris Diack (723 comments) says:

    Assuming the property gifted was the money (money is a species of property) S63(1)(a) Estate and Gift Duties Act 1968 targets donors domiciled in New Zealand; or S63(1)(b) Estate and Gift Duties Act 1968 targets gifts where the property is in New Zealand.

    Thus assuming the Glenn gift was the money and that this is property, one would have to show that either Glenn is domiciled here or the money was here. If the money came directly from overseas without being “domiciled” prior to Winston receiving it, there it appears no gift duty would attach.

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  3. Nigel Kearney (747 comments) says:

    I agree with Chris. I don’t see how the donation can fit within s 63(2)(e). The debt was not the gift given by Glenn – how could it be when the debt was owed by Peters to his lawyer?

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  4. getstaffed (9,188 comments) says:

    If the bargain is unequal, then it will be considered a gift under the Act

    The going rate for an honorary consulate role is much less than $100k so Peters is definitely the recipient of a gift

    .. but …

    if Peters has reduced the price of democracy to just $100k then he should be tried for treason!

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  5. ben (2,385 comments) says:

    ie, any bargain that is intended to be unequal is effectively treated as a gift – so I cannot sell my house to you for $10 and say “that is just our contract”

    If there are similar laws in Australia, I wonder if Toll will be paying gift duty on their sale of rail stock to the NZ govt. I think Cullen is on record as saying he paid more than it was worth.

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  6. kisekiman (224 comments) says:

    If not a gift then would it be considered income?

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  7. Hagues (711 comments) says:

    “(e) a debt owed by a person … is treated as property situated in NZ if any of the debtors are resident in NZ”.

    I’m certainly not legally qualified, but my natural reading of this is that the point of this clause is not whether there is debtor/client relationship between the giftee and giftor, but the location of the debt that is paid. So if Winnie owed say an Australian lawyer and OG paid that bill then it is not property situated in NZ. But since Winnie’s debt was located here then it counts as property situated in NZ.

    I think that if the $100k OG donation/gift was the only issue then lawyers would be arguing back and forth, and Helen turning a blind eye until well after the election. However Sir Bob’s revelations seem to have a clear cut case of non declation of donations that should sink the ship good and proper. If not then there is something seriously wrong.

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  8. democracymum (660 comments) says:

    Question for the House – John Key to Helen Clark

    Given that Owen Glenn paid $100,000 to NZ First in the hope of attaining the position of Consul to Monaco
    What promises were made to to Owen Glenn by Labour for their much larger $500,000 donation?

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  9. PaulL (5,774 comments) says:

    A gift is:

    the payment, release, discharge, surrender, forfeiture or abandonment of any debt

    So, either:
    1. Owen paid the debt directly on behalf of Winston. Which would be a payment as above.
    2. The money went as a gift directly to Winston.

    If the exclusion people think exists is that a gift from overseas directly to Winston doesn’t constitute property in NZ, then that would be a pretty big loophole. It would mean that overseas people could gift money directly to a trust domiciled in NZ withou being subject to gifting limits. So, imagine someone living in NZ with a trust in NZ. As per standard practice, they transfer property to the trust, getting in return a debt owed by the trust. They then forgive that debt at the rate of $27,000 per annum or whatever the limit is.

    If, however, they go overseas for long enough to no longer be domiciled in NZ, then it would seem they can forgive the full amount in one go with no gift duty applying. That would be a very significant loophole. Since NZ trusts have some quite attractive tax treatment, it could be useful for foreigners (say, Australians) to create NZ trusts and donate money and property into them. Now all their profits would be capital gains tax free. I don’t see that happening, so I suspect this loophole doesn’t exist.

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  10. side show bob (3,660 comments) says:

    To be fair this whole episode says more about how many New Zealanders deal in a back room deals. I know many farmers do deals similar to what Winnie has only not so much on the legal front. Many back door deals and cash under the tables go on because we have an oppressive tax system and a government that has greed in it’s middle name and loves nothing more then introducing rules, levis, rates etc. There should hardly be any surpise when some get caught screwing the system but unfortunately for Winnie he’s part of the system and sets the rules and as such should get a good arse kicking.

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  11. Chris Diack (723 comments) says:

    PaulL:

    When the creditor is forgiving debt the Trust is the debtor and it is resident in New Zealand thus gift duty applies after $27K – see S63(2)(e) Estate and Gift Duties Act 1968. The test in the debt forgiveness section is about the location of the debtor.

    If there is no creditor – debtor relationship then there cannot be any forgiving of a debt. In that case if the giftor isn’t domiciled in New Zealand or the property that is the subject of the gift isn’t located in New Zealand then no gift duty attaches – S63(1)(a) or (b) Estate and Gift Duties Act 1968. Remember the giftor is theoretically subject to taxation elsewhere.

    As a general point I don’t know why one would describe a situation where gift duties do not attach as a “loophole.” Surely the bigger question is why is the State taxing gifts at all. I am not sure how the rest of the world’s population would feel about the New Zealand government taxing non resident not domiciled persons.

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  12. gd (2,286 comments) says:

    Bugger So does that mean the Trust Accounts in the Isle of Man Jersey the Caymans Bermuda that have been paying all my bills for me for so many years have a gift tax obligation in NZ

    Jeeeez

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  13. PaulL (5,774 comments) says:

    Chris, the gift tax regime is an alternative to the Australian regime. Trusts are favourably taxed v’s individuals. In Australia they get around this by forcing all trusts to distribute every bit of return to a real taxpayer, and then taxing it in their hands. If the return is retained in the trust then it gets taxed at the maximum marginal tax rate.

    In NZ, we handle it differently – we limit how much someone can contribute to a trust. It seems to me that leaving a loophole where someone can gift beyond that limit would allow many ways to avoid tax. I could, for example, gift to someone domiciled offshore (I’m presuming that gift duty doesn’t apply in that situation). They then gift to my trust. Net effect – my money went to my trust without gift duty. Sure, IRD can look beyond the transactions to determine the true purpose, but I’m sure I can dress it up in such a way that it isn’t obvious – maybe someone offshore over-invoices me for a while, then gifts to my trust, or any of a bunch of constructs.

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  14. PaulL (5,774 comments) says:

    gd: no, there is a difference between a distribution from a trust of which you are a beneficiary, and a gift.

    Personally I’d get rid of all gift duty – and harmonise the tax rates so there was no particular advantage to having a trust other than asset protection. I’d also get a capital gains tax as well whilst I was at it. Luckily (or unluckily, depending on your viewpoint) for you, I’m not running things.

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  15. rolla_fxgt (311 comments) says:

    Second, that general definition in s 2 is further expanded upon to include a whole range of transactions where 1 party gives / receives more than the other (ie, any bargain that is intended to be unequal is effectively treated as a gift – so I cannot sell my house to you for $10 and say “that is just our contract”. If the bargain is unequal, then it will be considered a gift under the Act).

    So the govt owes gift duty on the rails when they brought them for $1? Surely this was far below their worth. Do the govt books list a gift duty liability? Or is this why they paid so much above market value for the rolling stock, so they can say it was a package & over all total paid was the approximate value so no gift duty is owed.

    From everything I’ve read & understand Winston owes the tax pure & simple. I actually hope he refuses to pay it, & the IRD have the court case in the news everyday throughout the election period.

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  16. natural party of govt (461 comments) says:

    I love the ignorant bush lawery that comes out on kiwiblog.

    If we follow this logic through, everytime a party pays the legal fees of a candidate, for example in an electoral petition or anything else relating to their activities as an MP, they would have to pay gift duty.

    Everytime a firm pays the legal costs of an employee named in a civil action they would have to pay gift duty.

    Everytime the government pays the legal costs of a public servant named in a civil action they would have to pay gift duty.

    http://www.ssc.govt.nz/display/document.asp?docid=2010&pageno=7&displaytype=std

    “The Directions also provide that if an employee of a department is named as defendant in a civil action arising out of the course of their employment, the Crown shall bear the expenses of that defence and the Attorney- General may take over the conduct of the case. ”

    Why is the quality of DPF’s blogging sinking like a stone?` Is it because kiwiblogblog is no longer around to keep him up to (the) standard?

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  17. PaulL (5,774 comments) says:

    NPOG: there is a difference between a legitimate relationship where an employer, a family member etc pays for something, and a relationship where someone just gives you money. An employer indemnifying you or paying for costs incurred in your job is very a very different concept to a gift. The law also reflects this.

    In the case we are discussing, some money was given by someone without one of those relationships. That money either:
    – went to Peters personally, and is therefore a gift
    – went to Peters’ lawyer (outside a trust) who applied it to a bill that Peters owed, and is therefore a gift
    – went into a trust of some sort, which then later applied it to a bill on Peters’ behalf, in which case Peters failed to declare a beneficial interest in a trust.

    There doesn’t appear to be an option where some sort of law hasn’t been broken.

    I realise that you want this to not be the case, but you are simply wrong to think that the quality of DPF’s blogging is falling. As for kiwiblogblog – it never kept anyone up to standard, it was an echo chamber. Perhaps you are just missing that echo chamber where everyone agrees with your ludicrous statements.

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  18. natural party of govt (461 comments) says:

    “An employer indemnifying you or paying for costs incurred in your job is very a very different concept to a gift. The law also reflects this. ”

    Quite and Winston Peters legal costs regards Tauranga electoral petitions are a legitimate expense regarding his political position, his job as a parliamentarian and a minister and his position as a public figure.

    Did David Lange personally fund all the expenses for his legal actions? Or did he pay gift duty on the money that was given to pay his court fees and legal bills?

    Do all those electoral petitions that get filed get paid by the candidate themselves? Yeah right. Do their political parties pay gift duty for funding these electoral petitions taken out in the individuals name? Yeah right.

    Yeah right, the hypocrisy and legal ignorance on display here is utterly astounding.

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  19. PaulL (5,774 comments) says:

    Bullshit. Taking a legal action that fails is not a legitimate cost of his job. It isn’t like other parliamentarians are doing it at the drop of a hat like he does, and certainly the govt doesn’t fund it – which presumably it would if it were a legitimate cost of the job. If Winston were supporting a National govt you’d be baying for his blood. You are a complete hypocrite.

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