Gift duty abolition

Sections 2(2) and 61 of the Estate and Gift Duties Act 1968

The new legislation abolishes gift duty for dispositions of property made on or after 1 October 2011. The change follows a review of gift duty, which revealed that the compliance costs far outweigh both the revenue it collects and the limited protections it has offered to prevent tax avoidance, social assistance targeting and defeat of creditors.

The definition of a "gift" in section 2 of the Estate and Gift Duties Act 1968 (EGDA) is amended so that the term refers only to dispositions of property before 1 October 2011. The Bill also amends section 61 of the EGDA to ensure that gift duty is payable only for gifts made from the Act's commencement until 1 October 2011.

Background

Gift duty has existed in New Zealand since 1885. Its original purpose was to protect the estate duty base (by discouraging the gifting of assets before death) and to raise revenue. When estate duty was abolished in 1992, the government of the day decided to retain gift duty to protect against income tax avoidance and social assistance targeting until alternative protection measures could be introduced.

Ministers and officials have received frequent requests for exemptions from gift duty and for a review of the gift duty thresholds over the past few years. The thresholds of $27,000 for non-dutiable gifts and $12,000 for the filing of gift statements were set in 1984 and have not been revised since. In addition, administration of gift duty has become antiquated, with no provision for the electronic filing of gift statements or any form of payment other than by cheque. Further, the valuation of annuities for the purposes of gifts under the EGDA is set according to life expectancy data that is more than 25 years out of date.

With this background, a review of gift duty was initiated. Options considered included:

• narrowing the scope of gift duty to apply only to gifts between individuals, trusts and closely held companies;
• raising the thresholds at which gift duty applies;
• removing the requirement to file gift statements for non-liable gifts;
• introducing electronic systems for the filing of gift statements and payment of gift duty; and
• updating life-expectancy tables for valuing annuities under the Estate and Gift Duties Act 1968.

As the review progressed, a strong case for outright abolition emerged. Some of the concerns which existed in 1992 have been addressed or reduced by the strengthening of existing legislative provisions. Remaining areas of concern were scrutinised in consultation with the Treasury, the Ministry of Economic Development, Ministry of Justice, Ministry of Health, New Zealand Police, the Ministry of Social Development, and Housing New Zealand Corporation. None of these agencies opposed gift duty abolition and several have said they will make administrative changes to support its abolition.

The review concluded that gift duty no longer raises any significant revenue and imposes a high level of compliance costs on the private sector. The protections offered by gift duty in the areas of income tax, creditors and social assistance have been incidental rather than intended policy goals. The analysis undertaken across government revealed that the protection gift duty offers is inefficient, limited and outweighed by the significant compliance costs that it imposes on the private sector. Therefore Ministers decided to abolish gift duty and an effective date of 1 October 2011 was chosen to provide certainty for the private sector.

The government agencies mentioned above will monitor the effects of gift duty abolition on their respective areas of responsibility. Inland Revenue will also co-ordinate, in due course, a post-implementation review to ensure there are no unintended consequences arising from the abolition of gift duty.

Key features

• Gift duty will not be payable for dispositions of property made on or after 1 October 2011.
• Gift statements will not need to be filed for dispositions of property made on or after 1 October 2011.
• Gift duty and gift statements will remain due for dispositions of property made prior to 1 October 2011.

Application date

The new legislation abolishes gift duty for dispositions of property made on or after 1 October 2011. The EGDA remains effective with respect to dispositions of property before this date.

Detailed analysis

Record keeping requirements

Gift statements will not be required for dispositions of property made on or after 1 October 2011. However, requirements to ensure the legal certainty of gifts, such as deeds of gift for trusts, are unchanged. Taxpayers may, therefore, still need to consult a lawyer when making a gift.

Income tax implications

The abolition of gift duty does not have any impact on income tax anti-avoidance rules. As has always been the case, a gift may be deemed to be part of a wider arrangement of tax avoidance under section BG 1 of the Income Tax Act 2007.

There is a range of provisions in the Income Tax Act 2007 designed to directly ensure integrity around arrangements involving gifts, in addition to the general anti-avoidance provisions. These include:

• section HC 35, the minor beneficiary income rule;
• section EW 38, which provides for the disposal of financial arrangements for less than fully adequate consideration; ¹
• section HD 15, which creates joint and several liability of company directors and controlling or interested shareholders where a company enters into an arrangement that results in an inability to meet its tax liability;
• sections CD 6, which deems there to be a dividend for transfers of value from a company to an individual;
• subpart CX, which treats certain gifts to employees as a fringe benefit;
• sections FC 1 and FC 2, which provides for the treatment of distributions from companies and trusts, gifts, and transfers of assets and liabilities upon death as disposals and acquisitions at market value; and
• section GC 1, which provides rules for disposal of trading stock for less than fully adequate consideration.

Additionally, the Goods and Services Tax Act 1985 provides rules for dealing with transactions when goods and services are supplied to final consumers at non-arm's length terms, refer section 10(3).

¹ Section EW 44 provides an exception to this rule where the creditor forgives the debtor's debt because of the natural love and affection the creditor has for the debtor.