Introduction

A brief history of gift duty in New Zealand

Gift duty has applied in New Zealand since 1885. Originally, gift duty was intended to buttress the estate duty regime (by discouraging the gifting of assets prior to death) and to raise revenue. When estate duty was repealed, gift duty was retained as an interim measure to protect the tax base against tax avoidance and to maintain the integrity of social assistance targeting. In addition, the imposition of gift duty has acted as a disincentive to debtors disposing of their assets to defeat the claims of their creditors.

Gift duty has had a significant impact on the operation of trusts. The imposition of gift duty on gifts exceeding $27,000 per year has limited the transfer of wealth to trusts. In order to avoid the imposition of gift duty, property must be transferred to a trust at market value and the resulting debt back progressively forgiven at the rate of $27,000 each year.

While such a gifting programme does not give rise to a liability for gift duty, it does result in significant compliance costs. At a minimum, completing a gifting programme requires that a resolution of trustees, a deed of forgiveness of debt and a gift statement are prepared each year. In addition, a new deed of acknowledgment of debt may need to be prepared if additional advances have been made during the course of the year or if part of the advance has been repaid.

Given that approximately 225,000 gift duty statements are filed each year, and the average cost of completing the annual gifting programme is approximately $285 plus GST, the amount of fees generated by the legal profession (and other trust professionals) for assisting clients in progressively gifting assets to trusts amounts to more than $70 million per annum. This is more than 2.5% of the total amount spent on legal services in New Zealand each year (and would amount to a significantly higher percentage of fees generated by smaller law firms for whom private client work represents a significant portion of their fees).

In contrast, gift duty has historically raised minimal revenue (approximately $2 million per annum), and that amount was expected to reduce to approximately $1 million per annum over the next five years. In addition, administering gift duty costs the Government approximately $430,000 each year, but the total cost is likely to be significantly higher once indirect costs are taken into account.

On 1 November 2010, the Minister of Revenue, Peter Dunne, announced the Government’s intention to repeal gift duty from 1 October 2011. The amending legislation is contained in the Taxation (Tax Administration and Remedial Matters) Act 2011. The amendments to the Estate and Gift Duties Act 1968 were fairly uncontroversial, and only nine submissions were made on the Bill. Six of these submissions were in favour of repealing gift duty, and one submission was against it. Notable submissions were made by the National Council of Women and the New Zealand Law Society, both of whom raised concerns regarding the interaction of gift duty and relationship property.