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Gift duty: A check on widespread tax avoidance?

Published: Thu 9 Dec 2010 01:20 PM
Gift duty: A check on widespread tax avoidance?
Published: December 9, 2010
by Russel Norman
Frog Blog
The Green Party opposed the first reading of the Taxation (Tax Administration & Remedial Matters) Bill last night on the grounds that the Bill will abolish gift duty—a left-over tax from a time when New Zealand had estate duties.
Gift duty was designed to prevent people giving away all their wealth on their death bed to avoid paying estate duty. Estate duty was abolished in 1992.
Inland Revenue estimate that New Zealanders today spend up to $70 million a year on fees to set up gifting programmes to avoid paying the duty. (Gift duty kicks in when people gift more than $27,000 per annum.) As a result, gift duty only raises $1-2 million in tax revenue each year. If you believe IRD’s figures, gift duty is a very inefficient tax that serves only to make lawyers and accountants rich, so shouldn’t we get rid of it?
Maybe, but tax efficiency isn’t the only way to measure the worth of a law. Gift duty has incidentally acted as a check on the amount people can move into tax avoidance vehicles like trusts. Trusts can be used for the purposes of tax minimisation, defeating creditors, lowering personal worth to qualify for Working for Families, or depriving partners of their matrimonial property rights.
The extent that trusts are being used for such purposes is not yet known. The Law Commission is currently reviewing trust law but this Bill will precede their eventual findings by over a year.
The Government clearly has the process all wrong; they’re abolishing gift duty before they understand the way it’s acting as a check to all kinds of bad behaviour. Abolishing gift duty poses a real risk to the tax base; this Government is acting with imprudent haste.
Finally, the IRD’s own comments on the move are worth noting:
We believe that gift duty does not fulfil its current objectives and the risks of its repeal are low. However, it is not possible to precisely determine the extent to which gift duty alleviates issues such as income tax minimisation, social assistance targeting and defeat of creditors. Therefore, it is important that affected government agencies monitor the effects of gift duty repeal on their areas and make any necessary operational changes.
The Taxation (Tax Administration & Remedial Matters) Bill hasn’t a single special monitoring provision to ensure the abolition of gift duty isn’t detrimental to the integrity of the tax base. That’s simply inexcusable.
ENDS

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