Gift duty serves no useful tax function

18:42, Nov 16 2010

Last week, the Government signalled its intention to repeal gift duty. The announcement was accompanied by a "regulatory impact statement" (RIS), outlining the key points of the proposal and considering its effects.

The RIS clearly spells out what a costly and inefficient mechanism gift duty is.

The acknowledgement that there has been no general public consultation on the proposal is because the numbers show what a no-brainer the repeal of gift duty is.

Gift duty first applied in New Zealand in 1885, and was mainly intended to stop people transferring all their assets before they died to avoid estate duty. Given that estate duty hasn't been around since the early 1990s, gift duty is now mainly seen as a way of protecting creditors.

The current rates of gift duty range from nothing up to $27,000 to $5850 plus 25 per cent on excess over $72,000.

The current thresholds have applied since 1984. In today's dollars, the $27,000 exemption would be nearly $80,000.


Despite that threshold, gifts made by a person that exceed $12,000 must be notified to Inland Revenue.

There are a number of other exemptions, such as small gifts, charitable donations, and gifts for the maintenance and education of family members.

Some of the interesting facts and figures provided in the RIS are:

Inland Revenue processes around 225,000 gift statements every year.

Of the gift statements filed, 99.6 per cent do not result in any gift duty to pay (mainly because they are for gifts of $27,000 or less). What duty is paid is often as a result of timing errors.

In the 2009/10 financial year, the Crown collected $1.6 million in gift duty. Administrative costs of collection are $430,000.

The cost to the private sector of preparing gift statements and associated legal documents is estimated at over $70m per year.

Gift duty has always been relatively easy to avoid.

Suppose you had an investment portfolio worth $1m that you wanted to put into a trust. Simply giving it to the trust would cost $237,850 in gift duty.

Instead, you would "sell" the investments to the trust and take a loan back. You would then forgive the loan at an annual amount of $27,000. To speed things up, you could split the asset with your spouse (no gift duty on that) and together gift $54,000.

The tax benefits of such a transfer are immediate because any income earned from the investments belongs to the trust from date of transfer.

That is why the RIS recognises that repealing gift duty will not significantly affect income tax. The recent alignment of the top personal rate with the trustee rate (33 per cent) also addresses this.

The repeal of gift duty will have flow-on effects for other areas, including creditor protection and the provision of social assistance (for example, rest home subsidies).

The RIS indicates that there are already sufficient measures in place to deal with those matters and that the consequences are relatively insignificant compared to the estimated cost savings.

It is inappropriate to maintain a tax regime simply for the purpose of addressing these non-tax issues.

Legislation repealing the Estate and Gift Duties Act is expected to be introduced this month, to take effect from October 1, 2011.

* Opinions expressed in this column are general in nature and are not intended as a recommendation or guidance to any individuals in relation to structuring their tax or finances. Readers should not rely on these opinions and should always seek independent professional advice specific to an individual's circumstances.

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