Gift Duty abolished

November 2nd, 2010 at 1:00 pm by David Farrar

Brian Fallow in the Herald reports:

The Government is to abolish gift duty, confident any risks to creditor protection or the targeting of social assistance programmes can be met by other laws.

The 125-year-old tax has brought in an average of $2.2 million a year over the past seven years, and on a declining trend.

But officials estimate it imposes $70 million a year in compliance costs on taxpayers, or rather on non-taxpayers, as only about 900 or 0.4 per cent of the 225,000 gift duty statements filed to the Inland Revenue a year disclose a liability to pay the tax.

A sensible move by . Peter has been a revenue Minister in three separate governments, and has actually a achieved a lot of useful reform.

The good news with the law change is that Kiwblog readers can now donate more than $27,000 per annum to me, without attracting gift duty :-)

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40 Responses to “Gift Duty abolished”

  1. Lance (2,311 comments) says:

    Nice to see another idiotic law fade away into history.

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  2. adze (1,695 comments) says:

    Great for Lotto winners who want to help out their family…

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  3. kaya (1,360 comments) says:

    Scuse my ignorance but can someone tell me if this means you can transfer property to a trust in one go? I looked at it a few years ago to protect it for my kids but the time to transfer put me off. Cheers for any info/advice.
    Oh and good to see anything being done that reduces bureaucracy and bullshit.

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  4. GPT1 (2,043 comments) says:

    The relief to be able to gift you money is palpable.

    In terms of the ins and outs does this mean that I can gift everything into a trust next October?

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  5. OECD rank 22 kiwi (2,787 comments) says:

    That’ll make administering Trusts a whole lot easier. Well after the initial first year of gifting all outstanding loans any way.

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  6. unaha-closp (1,033 comments) says:

    Sorry there must be some confusion, but I thought you were meant to be paying us to read this.

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  7. Bullitt (136 comments) says:

    http://taxpolicy.ird.govt.nz/news/2010-11-01-abolition-gift-duty-go-ahead

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  8. lastmanstanding (1,154 comments) says:

    Thanks to the Nats. Gift Duty was yet another of the anti freedom laws we have in this country.

    I mean what can be more antifreedom than taxing you for how you want to utilise your own money.

    Now to see the reappeal of the other 2384 laws that deny good honest Kiwis their freedom

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  9. virtualmark (1,423 comments) says:

    kaya, GPT1 … yes, I believe it means that from next October you will be able to gift all of your assets to a trust in one single transaction.

    However, presumably the Courts would be able to look into any such transaction and – with the wisdom of Solomon – discern your motives for the transaction and require it to be unwound if they thought it was primarily to shield your assets from creditors, ex-spouses-with-a-grudge etc.

    Not sure if IRD could do the same, off their own bat, or whether they would have to apply to the Courts to have a “gifting” transaction reversed.

    I can see the merits of freeing people from the clerical obligations around gift filings. But I can’t help wondering if we’ll see a rash of Court cases as people try to get sneaky giftings reversed … “Hey, I want that family trust overturned because he owes me money but he’s done a swifty with his trust”. While the current system is a bit of a clerical overhead it at least keeps litigation costs down.

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  10. tvb (3,945 comments) says:

    Yes but your gift may attract an income tax liability.

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  11. PaulL (5,776 comments) says:

    Hmm. On the personal level – that means the gifting programme I never got around to setting up on the family trust is now not needed. Good news for me.

    On the country level – I suspect that the gifting duty was stopping people from alienating their assets other than at the rate of $27K p.a. Is there still a misalignment between the trust tax rate and the top tax rate? If so, expect everyone to suddenly get a family trust. I’d say this should have been timed to coincide with the alignment of the trust, company and individual tax rates, otherwise you get a mess.

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  12. david (2,482 comments) says:

    PaulL that may be a valid comment relative to income generating assets but generally speaking putting the family home into a trust doesn’t generate taxable income so has no tax effect. Saves a lot of argument between competitive offspring after you step off the twig though – Trust Deeds are generally clearer than wills, are less likely to be tampered with by gaga oldies than wills and are often clearer than wills in their interpretation when it comes to divying up.

    Depends a bit on the Trustees though.

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  13. gravedodger (1,426 comments) says:

    About bloody time,40 years ago would have been great but that would have denied lawyers and accountants their annual income stream as we moved to avoid the reimposition of dieing tax that the socialists will one day reinstate as a last grope at the wealth of rich pricks who don’t get around to legally denying them that pleasure.
    When we started along the path of wealth protection, death duty was only zero rated and required only an order in council to reinstate, next time the bastards will have a bigger job but that wont stop them.

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  14. lofty (1,295 comments) says:

    DPF how would you like your gift, C Ash or cheque?

    I just invested heavily in a Nigerian lottery scheme, so look forward to rather large sums of money to put into my philanthropic activities.

    The DPF benevolence & piss fund sounds like a worthy cause to me.

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  15. virtualmark (1,423 comments) says:

    I think the unusual thing about Gift Duty is that it was a tax that was never intended to raise a lot of money.

    Peter Dunne might be correct that NZ Inc incurred $70 million of costs while IRD collected only $2.2 million of gift duties. But as far as I can see the purpose of Gift Duty was actually to constrain the rate at which people could alienate their assets. It was there as a handbrake on behaviour rather than as a way for the Government to generate revenue.

    So the interesting question will be, in a world without Gift Duty what other mechanisms do we have to restrain that behaviour? And what will be the costs of those mechanisms?

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  16. Scott (1,614 comments) says:

    Good move-less tax is good. Still smarting about rise in GST though.

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  17. annie (533 comments) says:

    PaulL and virtualmark raise a very valid issue. It’s not the gift duty abolition that could be a problem, it’s the consequent change in behaviour if the restraining effect of the law is removed. As Phil Goff says: “Scrapping gift duty actually opens the way to tax avoidance…’.”

    It’s a bit like the mistake made when surcharges were removed on ACC physiotherapy treatment – the change in physiotherapist advice regarding need for repeat visits and patient demand for more treatment that led to an extraordiary expenditure on physiotherapy. If the rules are changed, people’s behaviour will change to take personal advantage of that in such a manner as to make cost predictions completely unreliable.

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  18. ben (2,386 comments) says:

    It took 125 years to abolish a tax that costs 35 times what it raises in revenue? How much more of this nonsense is going on?

    Great to see our government’s commitment to the elimination of waste.

    Give it another 125 years and perhaps we’ll see a New Zealand government get rid of tariffs on health supplements and t shirts, and other ingenious tax collection methods.

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  19. queenstfarmer (696 comments) says:

    Where’s the Labour press release expressing outrage at this removal of a tax on the rich (pricks)?

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  20. Nookin (2,890 comments) says:

    Here
    http://www.stuff.co.nz/national/politics/4299378/Labour-attacks-scrapping-of-gift-duty

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  21. tvb (3,945 comments) says:

    The tax actually was easily by-passed through structuring – a loan interest free repayable on demand was a common device with principal progressively gifted. Takes a while but it is commonly done.

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  22. Nookin (2,890 comments) says:

    Labour’s gripe is that rich pricks will reduce their tax liability. The Regulatory Impact report into the changes sees otherwise. Labour didn’t read it.

    Income tax concerns

    57. The number one concern related to the repeal of gift duty from an income tax perspective has, until very recently, been the ability of individuals to reduce their taxable income by transferring their income-generating assets to a trust. High-earning individuals could transfer assets such as shares or interest-bearing savings to a trust so that the associated income accrues to the trustee. This would allow the income to be taxed at the trustee tax rate instead of at the top marginal personal tax rate. Up until 1 October 2010, this would offer a tax saving of 5%. However, alignment of the trustee and top personal tax rate from 1 October 2010 will remove this tax advantage.

    58. An associated concern is that high-earning individuals could transfer income-earning assets to a trust in order that the associated income could be distributed to a low-earning beneficiary and consequently taxed at the beneficiary’s low marginal rate. The changes announced as part of Budget 2010 will not address this concern, as different marginal personal tax rates remain a feature of the tax system.

    59. However, the extent to which gift duty offers protection against this behaviour may have been overestimated. Under a common gifting programme, income-generating assets may already be instantly settled on a trust in exchange for an interest-free, on-demand loan that is progressively forgiven without attracting gift duty. The income associated with the transferred asset immediately ceases to belong to the person who has transferred it (the settlor) and it instead becomes trustee or beneficiary income.

    60. In family trust situations (including discretionary family trusts), the fact that the trustee owes the settlor the value of the asset has no effect on the income tax liability of either the trustee or the settlor. Generally, debt forgiveness may be taxed under the financial arrangement rules as remission income of the debtor. However, an exception exists for debts forgiven in family situations, in which case the amounts forgiven will not give rise to remission income. This is commonly known as the natural love and affection exception. The effect of this is that the tax advantages of transferring income from a high-earning settlor to a low-earning beneficiary via a family trust are available straight away. Gift duty does not slow down or prevent this activity.

    61. There is an argument that the compliance costs associated with gift duty act as a deterrent against such practices. However, the potential tax savings from these kinds of arrangements often significantly outweigh the compliance costs.

    62. Another concern is that high-earning individuals may directly transfer income-earning assets to low-earning family members for income tax purposes without the use of a trust. This can already be achieved without incurring gift duty through the use of a gifting programme. Further, it may constitute a tax avoidance arrangement which is void against the Commissioner in accordance with section BG 1 of the Income Tax Act 2007.

    63. Further protection is provided by specific provisions within existing tax laws. For example, under section GC 1 of the Income Tax Act 2007, disposal of trading stock for less than fully adequate consideration is taxed as if an amount equal to the market value was received at the time.

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  23. Jimbob (639 comments) says:

    Gift duty is a bloody pain. Abolishing it sounds too good to be true.

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  24. wreck1080 (3,527 comments) says:

    All I can see is that it will take money away from accountants and lawyers who administer these stupid gifting schemes. How sad!

    The cost of gifting schemes is some 70 million dollars a year, so it is a good thing that is gone.

    Now the trust tax rate is aligned with the top personal rate, I’d imagine the tax advantages of using a trust are probably gone. In fact, a trust will pay more tax than an individual as all income is taxed at 33%.

    I could be wrong though.

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  25. queenstfarmer (696 comments) says:

    Here
    http://www.stuff.co.nz/national/politics/4299378/Labour-attacks-scrapping-of-gift-duty

    Thanks Nookin – knew it would be there somewhere :) So Phil Goff thinks we should leave in place a tax that
    brings in $1.5m a year yet costs $70m to administer, just so the evil rich pricks don’t get a “tax cut”. Very telling. And I love it how Phil warns that this might lead to (sotto voce) “‘structuring’” (complete with quote marks). How awful – it might also lead to other untold evils like “planning” and “efficiency” – but then what would the nanny state be left to do?

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  26. labrator (1,691 comments) says:

    Even under the current system your trust can be opened up and/or unwound if it’s deemed its sole purpose was avoidance. So if just before you get sued you chuck all of your assets into a family trust, I don’t expect it will withstand the judiciary. If you’ve got a family and assets you want to protect for them then ensure that you’re gifting every year. History of regular gifting may be your only protection if the proverbial occurs.

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  27. thedavincimode (6,130 comments) says:

    wreck

    Herr Kullen’s spite tax on infant beneficiaries remains.

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  28. Inky_the_Red (719 comments) says:

    Maybe it is time we stopped let people give money to those who haven’t earned it.

    Somewhere told me the welfare discourages people from achieving for themselves. They get money for nothing so is very bad for them.

    Those who inherit wealth or are gifted wealth must be a major social problem. Let’s stop the madness now. People need to learn to look after themselves and not be supported by state nor family nor friends.

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  29. PaulL (5,776 comments) says:

    Inky: if you agree that we should abolish welfare, I’ll happily agree that we should stop all gifting by imposing punitive taxes that make it uneconomic.

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  30. Manolo (12,637 comments) says:

    “People need to learn to look after themselves and not be supported by state nor family nor friends.”

    Inky has spoken from the heart. Let start by dismantling the so much abused welfare state, home to too many bludgers and parasites.

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  31. Dirty Rat (504 comments) says:

    Fantastic !!

    Mr Barber will be very busy soon. Just read the Bill regarding the transition from LAQC’s to LTC’s and we are pissing ourselves laughing.

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  32. big bruv (12,380 comments) says:

    So where would that money go Inky?

    Would you ban all inheritance?

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  33. badmac (138 comments) says:

    Labors problem is the bigger picture.

    Labor want to bring back the top tax rate to “penalize the rich pricks”. If all those people move all their income generating assets into Trusts under the National plan (with aligned tax rates and no gifting tax), then there will be nobody to pay the “Rich Prick Tax”, except those earning too much and unable to shift income (Doctors, Lawyers, Dentists, etc) . So Labor will be forced to raise the tax rate on Trusts, which are able to simply dissolve and redistribute the assets. Into say a company via a sale and capital gain (tax free) process.

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  34. gazzmaniac (2,270 comments) says:

    Or put it in a trust owned company (with a 28% tax rate rather than the 33% rate for trusts) to begin with, thereby still keeping the assets protected?

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  35. Inky_the_Red (719 comments) says:

    Gift duties or inheritance taxes is they tax a transfer of money from the person who earned the money to someone else. I can see no reason not to tax these transfers. Why should I inherit from the labours of my parents or grandparents?

    If I contributed to the wealth (by some form of work) then why should that work not be taxed like any other form of pay?

    To me the tax system in this area is inconsistent. Just like the exemption of financial services from GST.

    The only thing that is in common is that no gift duties, no inheritance taxes and no GST on financial services are all tax-free benefits to the more wealthy in society. This appears unjust to those less fortunate. However wealthy people are in charge and they really see no reason why they should pay any tax at all. So Billy the Kid from Dipton and his currency speculator boss get to make the rules. The excuse is it costs too much for the wealthy to try (or succeed) to evade seems to be the reason for the change.

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  36. ch123 (460 comments) says:

    Using your argument, I should therefore be taxed for putting away $40 every month for each of my two sons (currently aged 1 and 6) so that when they go to university, learn a trade or whatever when they leave school they have the money for it.

    But why should I be taxed for doing that? I’ve already paid tax on it when I earned it in the first place.

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  37. Dirty Rat (504 comments) says:

    Badmac

    The advantage of Trusts is the distribution of income to whoever you want, your scenario screams ‘scam’.

    Your other distribution results in a Depreciation recovery as assets must be transferred at Market Rates, however the same taxable value of the Asset remains in the Company. Your Capital Gain with the trust remains there, however there are issues when you distribute to a Beneficiary (The same issue maybe when a company that is not a QC (and thats another part of the dreadfully poor thoughtout QC/LAQC bill) distributes Capital Gains), especially when you have normal income.

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  38. GPT1 (2,043 comments) says:

    Inky makes the mistake of equating someone exercising their freedom of choice to gift money with the state compelling the transfer of money. One is charity the other is taxation and redistribution. The left see the former as undermining the role of the state to solve all problems.

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  39. Ash (1 comment) says:

    What I don’t understand is why Gift Duty was ever considered sensible. Yeah, there might be the issue of shifting income-earning assets into a trust. However, now that tax rates are the same that’s no advantage. People forget that the money has already been taxed, i.e. it hat to come from somewhere at which point it got taxed. So Gift duty was just a double tax. It is abhorrent that I can’t gift to my children WHATEVER I want without paying the government tax.

    Yay for no gift duty. Will save so much money. Not paying lawyer $500 a year in fees for signing a form.

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  40. Inky_the_Red (719 comments) says:

    GPT,

    I never realised that transferring large amounts of money to someones relatives or a family trust was charity. The things you learn I Kiwiblog.

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