Court of Appeal decides forgiveness of debt can be a charitable gift qualifying a taxpayer for donation tax credit

Summary

This was an appeal of the High Court’s decision that Nancy Lois Roberts’ forgiveness of debt was a “charitable or other public benefit gift” within s LD 3(1)(a) of the Income Tax Act 2007 (the ITA) qualifying her for a donation tax credit (Nancy Lois Roberts v Commissioner of Inland Revenue [2018] NZHC 2153).

The Court of Appeal upheld the High Court’s decision and found that:

For the purposes of s LD 3(1)(a), the term “monetary” means “of or pertaining to money”;

• In this context, “monetary” is not limited to include only cash, credit cards, cheques and bank transfers as the Commissioner submitted;
• In this context, “monetary” also includes a right to receive cash, such as sums standing to the credit of a bank account, or invested in securities; and
• Mrs Roberts’ forgiveness of debt was a monetary gift that was paid.

Impact

As a result of this judgment, taxpayers who have made gifts of forgiveness of debt can qualify for donation tax credits.

However, on 17 December 2019, the Minister of Revenue issued a media statement proposing an urgent remedial amendment to clarify that debt forgiveness does not qualify for donation tax credits. The proposed amendment would apply retrospectively to 1 April 2008, being the commencement date of the ITA. A savings provision would apply to taxpayers who have already taken a position in reliance on the current legislation and have filed a return or donation tax credit claim before the date of the announcement.

The amendment is contained in the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill. The Bill has passed the Second Reading Stage on 4 March 2020.

Inland Revenue will continue to monitor the situation in light of the judgment and the proposed amendment.

Facts

Mrs Roberts and her late husband jointly established the Oasis Charitable Trust (the Trust) in 2007 and registered it with the Charities Commission.

In October 2008, Mr and Mrs Roberts lent $1,708,080.90 to the Trust (the Loan).

In each income year ending 2011 to 2015, Mrs Roberts executed Deeds of Gift which released the Trust from liability to repay specified amounts of the Loan. She then claimed a donation tax credit for each of those five years on the basis that the forgiveness of debt was a charitable gift. The donation tax credits totalled $91,577.24, which corresponded with the $274,732 worth of debt that was forgiven.

The Commissioner of Inland Revenue (the Commissioner) issued a notice on 4 May 2016 requiring repayment of the portion of donation tax credits paid to Mrs Roberts relating to the forgiveness of debt.

The High Court had dismissed P’s judicial review ([2019] NZHC 98).

Issues

The Court of Appeal was required to determine whether Mrs Roberts’ forgiveness of debt owed to her by the Trust, qualified as a “charitable or other public benefit gift” under s LD 3(1) of the ITA.

Decision

The Court of Appeal dismissed the Commissioner’s appeal, holding that a forgiveness of debt was capable of being a “monetary gift” under s LD 3(1)(a) of the ITA and that Mrs Roberts was entitled to the donation tax credits she received.

The Court applied s 5(1) of the Interpretation Act 1999, which provides that the text of the statutory provision and its purpose will determine the correct interpretation, noting that even if the meaning of the text appears plain in isolation of purpose, it must be cross-checked against the purpose to satisfy the dual requirements of the Interpretation Act.

The words used in the legislation

The Court noted the definition of “charitable or other public benefit gift” in s LD 3(1)(a) used the words “a gift of $5 or more that is paid” (for the 2011 to 2013 years), and “a monetary gift of $5 of more that is paid” (for the 2014 to 2015 years).

In interpreting the word “monetary”, the Court relied on dictionary definitions and concluded that for the purposes of s LD 3(1)(a), “monetary” is intended to mean “of or pertaining to money”. The Court accepted that the term “monetary” excludes a gift of land, chattel or services.

In interpreting the word “money”, the Court also relied on dictionary definitions and in particular, the Laws of New Zealand that defines “money” as follows (Laws of New Zealand Money (online ed) at [3] (footnotes omitted). The letters were added by the Court of Appeal for ease of reference):

• [A] The term “money” generally includes banknotes as well as coins. However, the amount of money that can be paid in the various small denomination bank notes and in coins is limited. [B] The term money is sometimes used to include not only actual cash but also a right to receive cash, such as sums standing to the credit of a bank account, or invested in securities. [C] The term may also be used in a popular sense to include all personal or even, exceptionally, all real and personal property. If the term “money” is used in relation to paying money into Court it is to be construed in its ordinary and natural meaning, as including money in foreign currency.

The Court was attracted to the wider definition set out in [B] in this context as the definition at [A] was too narrow and inapt for the general statutory context. The Court (in Commissioner of Inland Revenue v Nancy Lois Roberts [2019] NZCA 654 (the Commissioner v Roberts) at [38]) held that:

• Parliament clearly intended that payment could be achieved by debiting and crediting accounts, thus excluding a meaning of just bank notes or coins. It was common ground that the provision was not confined to money in this narrow sense.

Furthermore, the definition at [C] was too wide as it would include gifts of services, personal property, goods, chattels and land and it was clear that Parliament did not intend to include such gifts within s LD 3(1)(a).

Accordingly, the Court rejected the Commissioner’s assertion that the words “monetary” and “money” were limited only to cash payments and the like, and held that the text of s LD 3(1)(a) is not limited to include only cash, credit cards, cheques and bank transfers.

The legislative history and extrinsic aids

The Court considered the extensive legislative history of the charitable donations provisions and, in doing so, found it provided no support for the interpretation of “monetary” or “money” contended by the Commissioner.

The Court found that there has been, for a number of years, somewhat of a disconnect between the actual wording of the legislation and the commentary or discussion generated by officials (the Commissioner v Roberts at [58]).

References in discussion papers and officials’ reports that differed from the statutory language (such as commentary references to “cash donations” differing from the statutory language “money”) were considered by the Court as “imprecise paraphrase[ing]” that did not provide any real assistance in interpreting statutory language, at [58] – [62]. It noted that comments by officials, unless they form part of the Parliamentary record, are not an especially reliable, or orthodox, form of legislative history.

Policy arguments

The Court found that none of the policy arguments the Commissioner advanced to support her interpretation of the statutory language (avoiding significant compliance and administrative costs and the difficulty of valuing non-cash donations which could result in tax avoidance) were compelling or persuasive.

The Court agreed with Mrs Roberts that the concerns advanced under the grounds that excluding forgiveness of debt avoids significant compliance and administrative costs were exaggerated. It considered that if Parliament was concerned about this, these concerns could be addressed by more detailed and specific drafting of the statutory provisions.

The Court was also unpersuaded by suggestions that greater administration costs will arise with the inclusion of forgiveness of debts. While significant investigation and checking may be required for tax rebate claims in relation to gifts of cash, depending on the circumstances of the giving, the Court found that concerns about tax avoidance were overstated by the Commissioner. It noted that there are now robust statutory mechanisms in place to deal with any instances of tax avoidance in this context, at [64] – [66].