Hon PETER DUNNE (Minister of Revenue) Link to this
I move, That the Taxation (Tax Administration and Remedial Matters) Bill be now read a second time. This bill is important for New Zealand, as it introduces crucial changes to the tax system, which are needed to support economic growth and to ensure integrity and fairness within the system. A good tax system encourages economic endeavour by eliminating unnecessary hindrances and limiting compliance costs, and these themes run through this bill.
A key feature of the bill is the abolition of gift duty. Gift duty is a relic of the estate duty era, which is long since passed. It has continued to impose $70 million of compliance costs on New Zealanders each year, while no longer serving its intended purpose and raising less than $1 million in annual revenue. About 99 percent of annual gift duty returns are nil returns, which further illustrates the pointless nature of this tax. So it is time to abolish gift duty once and for all.
Since the notion of abolishing gift duty was first aired last year, some concern has been voiced about the consequences for the tax system. There have been predictable amounts of criticism that there has not been enough analysis. Well, let me assure members that the decision to proceed with the abolition of gift duty was taken following considerable research. Eight Government agencies were involved in consultation on the likely consequences of abolition, and the Inland Revenue Department was at the centre of the review. The decision, therefore, has not been taken lightly.
Members will note that the accompanying regulatory impact statement goes into some depth. That is because it is dealing with an issue of great moment: the abolition of a tax. So comprehensive was the regulatory impact statement that it has been described as a model of what a regulatory impact statement should be. It deliberately outlines the problems with gift duty, and considers a number of options for addressing them, before coming down in favour of repeal.
The potential for tax avoidance was one of the key areas considered during the gift duty review. The review concluded that gift duty is not an effective way to target tax avoidance. A range of existing rules in the Income Tax Act better target avoidance arrangements involving gifts. These include rules for gifts involving companies and employers, in addition to trusts. Last year’s Budget further reduced opportunities for avoidance by aligning the top personal tax rate and the trust tax rate. Trusts, therefore, can no longer provide a tax shelter, as was previously the case. The Inland Revenue Department will continue to monitor the situation, and a post-implementation review will be undertaken to ensure that existing measures are operating as intended.
The move to abolish gift duty is part of a carefully constructed package that has seen all marginal tax rates fall substantially, and the top personal and trust rates aligned. Any moves to unpick this package, by introducing either new taxes on capital or differential rates for trusts and the top personal rate, would inevitably raise questions about the need not only to reinstate a form of gift duty far more stringent than the one this bill repeals but to maybe restore estate duty, or indeed introduce some other forms of wealth tax to prevent significant avoidance occurring. An equally unpopular and cumbersome alternative would be to continue the alignment of the top personal and trust rates, but at a significantly higher level than is currently the case. The House should give careful consideration to those points as this debate unfolds, and as subsequent events unfold, as well.
This bill also includes a number of proposed changes to the rules relating to the tax disputes process, which complement major changes made by the Inland Revenue Department to the way it administers that process. Our tax system relies on voluntary compliance, and it is therefore appropriate that the disputes that inevitably arise are resolved quickly and efficiently for both parties.
The bill also introduces changes to the secrecy provisions in the tax administration rules, to help to bring the Public Service more into line with today’s customer service expectations, and to improve efficiency across the Public Service. Overall, these amendments will result in improvements in service provision, including improved accuracy, improved efficiency by eliminating duplication of effort, and increased detection and prevention of fraud.
A Supplementary Order Paper that was referred to the Finance and Expenditure Committee provides for the removal of the overtaxation of non-residents’ investment through portfolio investment entities. A number of useful submissions were received and considered by the committee, and the legislative changes have now been incorporated into the bill. Those changes will facilitate the development of New Zealand as a financial hub.
Earlier today I released a further Supplementary Order Paper to provide roll-over relief for depreciation recovery arising from the Canterbury earthquakes. This will make replacement of assets lost in the earthquakes more feasible for Canterbury businesses, and is another step towards providing taxpayers with relief from taxation on windfall gains from depreciation resulting from the earthquakes.
The Supplementary Order Paper also addresses the issue of the timing of deemed sales of destroyed insured assets, allowing the time of sale to be deemed the point when insurance proceeds can be reasonably estimated. The Government is seeking to encourage productive investment in Canterbury, and these depreciation measures will help to achieve that. As further tax issues arise in response to the earthquakes, the Government will assess them and respond accordingly, as indeed we have been doing throughout the course of this year.
The Government cannot, of course, control the business sector, but we can support it by providing an environment that creates jobs and wealth. By improving efficiency and removing undue compliance costs, this bill will help to create that environment, while also ensuring the maintenance of the integrity of our tax system. It is therefore with a great deal of pleasure that I commend the Taxation (Tax Administration and Remedial Matters) Bill to the attention of the House.
STUART NASH (Labour) Link to this
The Finance and Expenditure Committee spent a lot of time and heard a lot of submissions on various parts of the Taxation (Tax Administration and Remedial Matters) Bill. There is some very good law contained within the pages of this bill. However, there is one glaring addition in this bill, one glaring part, that Labour simply cannot support. It is a real shame that the abolition of gift duty was not brought to this House as a separate piece of legislation, because what will happen is that all the other good law in this bill, all the other remedial matters, will get lost in the arguments about the abolition of gift duty.
It is my contention, and it is Labour’s contention, that the abolition of gift duty will open the door to massive tax avoidance, and make the defrauding of creditors, including the Inland Revenue Department, vastly easier than it is at present. My belief is that the Government has misjudged this one, and that the Minister of Revenue is out of his depth. The Inland Revenue Department was given about $100 million recently to chase those people who use various schemes to perpetrate avoidance. Well, that department will need a hell of a lot more once this bill comes into force, because the day after this bill becomes law, without gift duty to slow things down, people will instantaneously move valuable assets more or less without restriction and without tax implications. Not all of those people will do that for the wrong reason; in fact, not many will do it for the wrong reasons. But some will do it, and enough will do it to cause concern.
The change to abolish gift duty was proposed as a way to simplify tax law and remove a $70 million burden and seemingly unnecessary compliance costs on taxpayers, plus about $500,000 of costs to the Inland Revenue Department. However, many submitters on the change and lawyers in private practice believe the impact of this change goes too far. Although in theory there are provisions to undo gifts in the event of insolvency, in practice one can move assets between entities and one can move them down a chain of entities, and that becomes very hard to undo. The change therefore has very wide-ranging implications for the law of trusts, the law of taxation, and the practicalities of debt enforcement, including in relation to wills and matrimonial property disputes.
Tax avoidance is a problem in this country. At the moment there are over 325 fraud cases, totalling about $450 million, under investigation by the Inland Revenue Department. This bill will add to that problem. In our minority report we state: “The analysis upon which the gift duty abolition proposal is based is fundamentally flawed because it does not adequately take into account the full range of potential tax avoidance opportunities. Trust structures are one subset of possibilities but these members do not accept that the analysis has been comprehensive. Accordingly the cost-benefit analysis upon which the bill rests must also be seen as fundamentally flawed, as no attempt has been made to quantify the counterfactual of avoidance risk pertaining to the full range of structures available. These members note that no sensitivity analysis has been provided. No options analysis has been provided. The policy process would not meet the standards expected under a thorough Regulatory Impact Statement.” At the least: “any legislation proposing the abolition of gift duty should be delayed until the Law Commission’s review of trust law is complete.” Contrary to what the Minister outlined in his speech, it is Labour’s contention that the analysis undertaken in this bill is not thorough enough to convince us that we should abolish gift duty at all.
Under present taxation law, if someone gifts assets of more than $27,500 to anyone, any being, or any entity, then that gift will attract taxation. Most people do not know this, and almost no revenue is ever collected, even though large gifts to trusts or family members are fairly routine. I was talking to a friend about this. This friend said to me: “I gave $100,000 to my son to help him get into his first house.” I said to this person: “Did you pay gift duty on that?”. He said: “No.” The awareness of gift duty was minimal, and for that I suppose we have to look at the Minister for not communicating the taxpayers’ obligation.
The reason gift duty is so easy to avoid is that the law has evolved a mechanism for circumventing gift duty in almost all circumstances. It is administering this mechanism, which looks a little like a sleight of hand, that costs taxpayers about $70 million a year. There are tens of thousands of trusts in New Zealand that have been set up in this fashion. Many professionals working in areas where they may be sued by their clients have trusts set up for this purpose. Rich individuals, families, and corporate entities of all kinds also use trusts to manage their property and wealth. Companies and corporates use them also for a variety of purposes, including creating structured tax arrangements designed to minimise tax liabilities.
The abolition of gift duty was considered when death duty was abolished in 1992, but ruled out in 1992 due to concerns about enabling tax avoidance. Various Government agencies will be responsible for monitoring the effects of gift duty abolition and the Inland Revenue Department has agreed to initiate a post-implementation review to ensure there are no unintended consequences. But I am very fearful that it is not this law but legal precedent that will decide many cases that are brought before the courts in respect of this bill.
The Institute of Chartered Accountants submitted that although it welcomed the abolition of gift duty, in its view there were “a number of tax avoidance opportunities that may arise in the absence of gift duty.” The institute went on to list five. The Institute of Chartered Accountants, the National Council of Women, and the Law Society all expressed concerns regarding the impact of the abolition on family protection and relationship property proceedings.
The Family Protection Act protects children and spouses who are excluded from inheritance from wills. By allowing full gifting prior to death, the interests of children who miss out on any inheritance will be extinguished. In the case of relationship property, a non - property-owning spouse or partner may find that the matrimonial home has been gifted into a trust without their knowledge and is therefore out of reach when they separate or divorce. A third major area of concern is creditor protection. Officials stated that there are three existing provisions in law that allow for gifts to be clawed back for the benefit of creditors. However, as I am sure the Inland Revenue Department would attest itself, the provisions that allow for the claw-back of assets passed between entities are very hard to enforce, mainly because by the time one can find a court to address the location of an asset it has moved somewhere else.
In theory, tax law is there to collect tax, so a tax that collects very little tax and costs millions to administer is, on the face of it, something of an aberration. Yes, gift duty was not intended to protect creditors, make tax avoidance more difficult, or protect children and spouses from losing family property. However, at present it does play a role in all three. The relatively few submitters to this bill argued pragmatically that the unintended consequences of this reform meant that any policy move in this area should be accompanied more slowly and carefully because of this. All of them can see the potentially huge implications that this change will have in several areas of law.
In practice, sophisticated tax avoidance involves the use of deliberately confusing structures to hide the true effect of financial arrangements. The removal of gift duty will make the design, construction, and execution of these arrangements easier. It will therefore make the enforcement of anti-avoidance law harder. On the issue of trusts, officials clearly pointed to the Law Commission’s work, as did Labour. We requested that this part of the bill, the abolition of gift duty, be delayed until at least the Law Commission had finished its work.
Why is the Government doing this? The beneficiaries of the law as it stands are the wealthy who have to pay fees in order to organise their affairs to protect and administer their assets. The removal of gift duty is bad law, and I am afraid that I cannot support it. Thank you.
AMY ADAMS (National—Selwyn) Link to this
I am very happy to take a call this evening on the second reading of the Taxation (Tax Administration and Remedial Matters) Bill.
Before I talk about gift duty, which obviously is one of the key elements of this bill, I will touch on the other major aspect, which is the changes being made around information sharing and secrecy. That is certainly an area that the Finance and Expenditure Committee spent quite a bit of time considering. Certainly we concur with the Minister of Revenue that there is a need for the Inland Revenue Department to share its information more efficiently and easily with other agencies, but of course we were very concerned to ensure that that is done in a proper and carefully controlled way. I think the balance that we have reached within the legislation as it is before the House is good and robust. One of the components we have built into the bill is a reporting back to the House on how that information sharing works, so that this House can continue to monitor the way in which those new powers are set out.
I will touch briefly on gift duty, and in particular respond to some of the comments of the speaker who has just resumed his seat, Stuart Nash. The contentions Labour Party members are putting up in relation to this aspect really reflect, more than anything, their lack of understanding about how this area of law works. The reality is that trusts already exist, people can already put their assets into trusts, and they can already avoid tax. Tax avoidance is a serious issue, but the abolition of gift duty will not make any significant difference.
The member referred to the concerns of the Institute of Chartered Accountants and the Law Society being on record, but it is worth pointing out that the beneficiaries of the $70 million of compliance costs that this outdated and useless regime imposes are the lawyers and the accountants. It is lawyers and accountants who get to charge that $70 million in compliance costs to their clients every year to comply with a system—and let us be very clear about this—that generates less than $1 million, but costs nearly half a million dollars a year to run. So we have a tax that is generating almost nothing and on which there is almost zero enforcement.
If we ask the Inland Revenue Department for records of gift statements for a transaction going back, the department can barely give us that information. There is no follow-up. This is not a highly enforced tax, and 99.6 percent of all transactions that go through the department are time-wasting for everyone involved, because there is no duty payable.
This tax has long since run its course. The costs imposed on the private sector—with the beneficiaries of those costs being the sector’s lawyers and accountants—are unnecessary. They are not serving any public good. They are not, in fact, protecting the beneficiaries that Labour claims they are protecting, and it is time this outdated duty was abolished. It is long overdue, and I am very pleased to commend the bill to the House.
Hon DAVID PARKER (Labour) Link to this
The Taxation (Tax Administration and Remedial Matters) Bill is another example of how this Government rules for the interests of a very, very narrow class of New Zealander. The previous speaker, Amy Adams, rose to her feet and did not address any of the issues that were raised by my colleague Stuart Nash. Already under current law there is no limit on gifts to a charity. Already under current law any person can gift $27,000 per annum without paying gift duty; a couple can gift $54,000 per annum without paying any gift duty.
This law creates a number of injustices. Peter Dunne believes in income splitting. The Government said it would not agree to income splitting. Editorials in this country said that income splitting was unfair. This legislation enables income splitting for people who can split assets and therefore the income from those assets. Wealthy people can avoid tax through splitting their assets and dividing their income.
Mr DEPUTY SPEAKER Link to this
That will do; I am on my feet. Just calm it down a little so that I can actually hear the debate.
Everything I have said so far is correct. An even more shameful example—[ Interruption] Amy Adams knows this; an incest victim in New Zealand can be cut out of a will. It happens quite often. The people who perpetrate the crime against the young person who is an incest victim blame the child sometimes. I have seen this in my own legal career. The Family Protection Act states that that child can make a claim against the estate for a fair share of the estate. This legislation prevents that, because in the week or decades prior to the death the older person can gift their estate beyond the reach of that child. They could give it all to the Filipino wife, and the incest victim, who currently has a remedy under the Family Protection Act, is being completely set aside by this Government. This is outrageous legislation. The Law Society came to the Finance and Expenditure Committee and told it that fact, and National has ignored it.
I will give another example. Matrimonial property can be put beyond the reach of the courts, through gifting. That is another example of the injustices that can be done under this ill-considered legislation. I will give members another example—
Mr DEPUTY SPEAKER Link to this
Interjections are fine, but where a member shifts seats—and members know who I am looking at—to gain an advantage, that is unacceptable. I ask members again to calm it down. Otherwise I will ask members to go out to the lobbies.
Every one of the examples I have given so far is factually correct. Amy Adams knows they are. There were leading submissions to the select committee. Great injustices are being caused as a consequence of this bill.
I will give members another example. The Institute of Chartered Accountants and the Law Society came to the select committee and said that the bill would put more assets beyond the reach of creditors. In other words, a creditor will have less of a remedy because the assets will have been transferred by gifting. In this situation there are some theoretical rights if it is done 2 years prior to the date of insolvency. If it is done more than 2 years prior to the date of insolvency, there are not. If Mr Petricevic started to put assets beyond the reach of creditors more than 2 years prior to his going bankrupt, his assets would be beyond the reach of any creditor under New Zealand’s law, following the enactment of this bill. That is another example.
I will give another example of how the tax base is being eroded. At present there are continuity of shareholder requirements in respect of losses in a company, so if a company makes a big loss—for example, a company might make a $10 million loss on a bad investment—that loss is not carried for the future benefit of shareholders, unless there is a continuity of shareholders. That rule can be worked around now, because assets can be gifted to that company to take advantage of some of those tax losses.
That is not the worst example. The worst example here, in my opinion, is what the Government is doing to an incest victim.
National members might deny that, but that is what the Law Society told them, and it was right. If assets are gifted out of the estate of someone who has perpetrated a crime of incest against his or her children, there will now be no remedy under the Family Protection Act. That is what the select committee was told, and that information was right, yet the Government is pushing on with this bill because it has another objective, and that is to serve the interests of the very narrow class of people who will benefit from this legislation. Those are the people who will benefit from income splitting, who will benefit from some of the continuity of shareholder rules, and who will benefit by effectively reducing their taxes. Bear in mind that if they reduce their taxes, someone else has to pay them. Who is that someone else? That someone else is someone less wealthy.
This legislation is terrible. We heard from Stuart Nash that at the time when death duties were abolished, the Government of the day—it was actually a National Government—said it would not abolish gift duty because there were all of these other potential problems with abolishing it. Since then it has done nothing to cure the other problems. National members just come here with a very simplistic logic, saying that the Government does not collect much in duty and therefore it is not important. They miss the other important factors: income splitting, creditor protection, and the protection of estates for people who have been abused by their parents. There are lots of other cases where people have not been abused by their parents but they have fallen out with them for some reason. It might be that a parent has married for the second time and the children do not get on with the second wife, and, therefore, for whatever reason, they are disentitled under the estate. That person could have a serious illness, there could be a moral duty owed by the deceased, the testator to the surviving children, and this legislation means that they will not have an effective remedy.
I have already mentioned the concerns around matrimonial property or other non-matrimonial partnerships. Again, this is something that both the Law Society and accountants warned about, and it is not even referred to by National in its commentary on the bill. It does not even address the issue. National pretends that the issue does not exist, because it does not meet National’s prescription. This is bad law. This Government plainly governs for the interests of a narrow section of the population and it is causing injustice.
Dr RUSSEL NORMAN (Co-Leader—Green) Link to this
The Green Party will not be supporting the Taxation (Tax Administration and Remedial Matters) Bill, for similar reasons to Labour. In my first reading speech on this bill I raised the concerns the Greens had at that time about the abolition of gift duty, and nothing we heard at the Finance and Expenditure Committee has led me to change my views about the abolition of gift duty as a major problem for the New Zealand tax system.
People need to understand that a bit of a cat and mouse game gets played between the Inland Revenue Department and trusts, because trusts are systematically used to avoid tax in New Zealand. We have a systematic tax avoidance problem involving trusts. It is very hard for the Inland Revenue Department to know what goes on inside a trust. There is some information about what goes on inside trusts, but often trusts are quite invisible to the tax department. It is difficult to crack down on tax avoidance activities without information about what is going on inside trusts.
Gift duty is important because fundamentally it provides a lot of information about what is happening to trusts in New Zealand. Even though on the face of it it does not appear to do much, about 220,000 statements on gift duty are provided each year. Very little tax is actually being raised, but there are considerable compliance costs. People said: “Hey, look. You’re not raising much money in tax. There are a lot of compliance costs here. Why on earth are you keeping this thing?” The reason gift duty plays a very important role is that it provides a lot of information about what is going on with regard to trusts, which will not be available once gift duty is abolished. The reason it provides information is that people can transfer only $27,000 per person per year as a gift without attracting gift duty, and they have to register that they are doing that, so a bunch of information is provided. Once gift duty is abolished, people can transfer very large amounts of money into trusts, hide it away, and move it around, so this bill will facilitate tax avoidance in New Zealand.
It is quite important for people to understand that this is quite a serious problem. The Minister of Finance even just today in the House was talking about the tax avoidance problem in New Zealand and how it is a significant problem. He talked about a number of changes he has made to the tax system to try to reduce the incentives for tax avoidance, and I acknowledge the work he is trying to do there. However, by abolishing gift duty we are actually reducing the tools we have available to crack down on tax avoidance. As Mr Nash said earlier, $450 million is currently under investigation because of tax avoidance.
We have some real opportunities with gift statements to track what is happening with assets going into trusts. It is also a great way of defeating creditors. Currently, if someone slips some money—quite a lot of money—into a trust, if their business goes belly up and their creditors come after them, they can hide their money in the trust. At the moment, we have quite a lot of information about the money flowing into trusts, because of the gift duty statements; once gift duty statements are abolished we will have a lot less. It will also be harder in matrimonial property disputes to track where the money has gone. Currently through gift duty statements we have quite a lot of information about the flow of assets into trusts that are tucked away and hidden away.
Most of all, given all of these concerns about the abolition of gift duty, and about the relationship between the abolition of gift duty and the use of trusts for tax avoidance, it seems to us to be particularly foolish to rush into this decision to abolish gift duty at a time when the Law Commission is currently undertaking a review of trust law. Trusts are, of course, very extensively used in New Zealand—more so than in other countries. They are used very widely for tax avoidance, as well as for lots of perfectly legitimate purposes. The Law Commission is currently conducting a review in relation to trusts, which includes issues such as how much transparency there is around trusts and how much we can see into them. At the moment it is hard to see into trusts, let alone to know they exist. If we do not know they exist and we cannot see into them, then it is very difficult to figure out whether they are being used for tax avoidance activities or for legitimate activities.
The Law Commission is currently conducting a review in relation to trusts to try to figure out whether we should be changing the rules around trusts, whether there should be greater transparency, whether there should be some kind of register, and whether there should be a central register of information about the assets being held in trusts and who the beneficiaries of trusts are. If this central register of information were to come out of the review of trust law, then it would actually provide an alternative way for the tax department to keep track of what is going on with regard to assets, trusts, and tax. There is a logic to that.
If the Law Commission came out with such a recommendation and such a register was set up, I think the Green Party and Labour would take quite a different view of this issue. But at the moment that has not happened. We are rushing through this change, which will potentially open the floodgates to tax avoidance in New Zealand, before the Law Commission has completed its review of trust law, which might actually ameliorate the whole problem. For that reason we are not supporting this bill. There are, of course, lots of good things about this bill, and it is a pity that this particular highly contentious issue has been included within it, but there we have it.
As we said in the first reading debate, we will not be supporting this bill. I know that National will rush through with this bill, with the support of ACT and, no doubt, United Future—Peter Dunne has been a champion of this bill. I think National members need to look at themselves and ask whether they are absolutely certain, in the absence of the Law Commission review of trust law, that this bill will not create opportunities for increased tax avoidance. Of course, the written advice from the Inland Revenue Department was that it could not be absolutely certain. To be fair, the department said it thought the probability was low, but it also said it did not really know. It was uncertain what the downstream impacts would be. Given the problems we already have with tax avoidance in New Zealand, why would we open another door to tax avoidance when we are not sure of the outcomes?
DAVID BENNETT (National—Hamilton East) Link to this
I want to take just a short call on the Taxation (Tax Administration and Remedial Matters) Bill, which we are dealing with tonight. There are two main aspects to it—gift duty and the information-sharing and secrecy provisions. Gift duty is an old tax that has had its time, and for the compliance costs involved it does not generate much revenue for New Zealand’s taxpayers. It is another compliance cost on the productive sector of the New Zealand economy. So this bill is another example of the Government delivering a more efficient system in which people can get on with doing business and making the most money for this country to go forward. The information-sharing and secrecy provisions are very important provisions that I think all parties in the House will support, in the sense that they will help the Inland Revenue Department in its relationship with other departments, and also it is in the best interests of the New Zealand taxpayer that the department be able to access the information that is needed to make sure taxpayers are paying their fair due. National supports this bill and I recommend it to the House.
RAYMOND HUO (Labour) Link to this
The purpose of the Taxation (Tax Administration and Remedial Matters) Bill is to abolish gift duty and, among other things, amend the Tax Administration Act 1994 in order to improve the ability of the Inland Revenue Department to disclose information in the course of good tax administration practice.
There are two main reasons why Labour opposes this bill. Politics is all about priorities, but under National, hard-working Kiwi families have been struggling to keep up with the increasing cost of living, and their power bills and food prices are increasing as the cold of winter bites.
Mr DEPUTY SPEAKER Link to this
This is a second reading debate—like last night’s debate was a third reading debate. We must confine ourselves to what is in the bill. Other things are irrelevant and should not be discussed.
Thank you, Mr Deputy Speaker. The reason I decided to say this was that I wanted to share with members and demonstrate that the National-ACT Government has its priorities wrong.
The second reason we oppose this bill is more of a technical nature. It is wrong to use a bill that is supposedly for administrative and remedial matters to push through the abolition of a tax. Such legislation should be reserved for technical changes and would usually be non-controversial. Therefore, apart from the provisions relating to gift duty, Labour supports the content of this bill, and in the normal course of events would vote for it. However, due to those concerns, we have to vote against the entire bill.
The Law Society and a number of other submitters raised a further concern that the abolition of gift duty would create problems for the enforcement of claims under the Property (Relationships) Act 1976 and the Family Protection Act 1955. Poorly thought-out legislation will simply require further amendments in the future. It is a waste of this Parliament’s time and will create huge legal uncertainties.
Further, the abolition of gift duty may create just another avenue for tax evasion. The submission from the Institute of Chartered Accountants of New Zealand noted a number of tax avoidance opportunities that may arise in the absence of gift duty. Even the Inland Revenue Department officials cautioned in the regulatory impact statement that tax avoidance could increase in the absence of the duty. It is no wonder that New Zealand Trustee Services called for any changes to gift duty to be delayed until the Law Commission’s review of trust law is completed.
The Law Commission has embarked on an in-depth review of trust law in New Zealand. The first issues paper was released in November 2010, and this year the Law Commission will release its fourth and final part on trust law. As Labour spokesperson for the Law Commission, I find it a bit odd that the Government has ignored the fact that the review of our trust law is under way and has still decided to go ahead and abolish the gift duty that has existed for 125 years.
I note that the reason for the decision is that the revenue from gift duty is about $1 million a year, but it costs the Inland Revenue Department about $500,000 to administer. On the other hand, the compliance costs on the private sector amount to $70 million each year. The fact that people currently spend $70 million every year on gift duty compliance to achieve something is no reason per se for removing it. I acknowledge that the original purpose was to protect the estate duty base by discouraging the gifting of assets prior to death and to raise revenue, and it has applied in some form since 1885. But, again, I am not convinced that gift duty should be removed on the basis that the original rationale is no longer relevant. More important, gift duty actually exists to prevent tax avoidance and so-called structuring. The scrapping of gift duty opens the way to tax avoidance and structuring.
Estate duties were abolished in 1992, but gift duties remained in place to prevent people from hiding assets in order to defeat creditors, avoid tax liabilities, and obtain access to Government benefits, such as rest home subsidies. This was one of the major concerns in reviewing whether gift duties should be abolished at all. But the Minister Peter Dunne, in his speech earlier, assured us that adequate measures are in place to prevent such manipulations and protect creditors. The Government will monitor the effect on the economy and the tax system to ensure there are no unintended effects or unexpected oversights that arise. I invite the Minister to advise us in more detail of the “adequate measures” at some later stage of the development of this bill. Naturally, once gift duty is abolished new assets can be transferred to a trust without the need for a gifting programme, and existing debts can be forgiven in full.
According to George Tanner QC, who is in charge of the Law Commission’s inquiry into trust law, which I wish was granted the attention of this House, New Zealanders must have a solid reason why they are so passionate about establishing trusts. In New Zealand there is one trust for every 18 people, in Australia it is one for every 34 people, in Canada it is one for every 148 people, and in the United Kingdom it is one for every 294 people.
The abolition of gift duty will have far-reaching consequences. The bill as introduced by Minister Dunne is very simple, but the change will have ramifications in other areas of law, as I covered earlier—for instance, relationship property, creditor protection, and insolvency. The Law Commission has proposed that the existing Trustee Act, which was passed in 1956, be reviewed and modernised. One of the outcomes is likely to be stricter compliance requirements for trusts. Here again are “stricter compliance requirements”. Will the stricter compliance requirements for trusts be warranted, for the Government to reject those recommendations? We will see.
We also learnt, according to the Minister who introduced this bill, that Government agencies such as Work and Income and the Inland Revenue Department could potentially establish new rules and procedures for how gifts to family trusts are treated. This could mean a trust settlor may not be able to simply gift the assets in one transaction, then expect wider benefits to accrue as a matter of course. Again, I invite the Minister to advise us of those possible measures, especially how gifting to family trusts is to be treated. As I said, given that the Law Commission’s review of trusts is in progress, will the Government implement the Law Commission’s recommendations, especially those recommendations that are contrary to what the Government has already done?
Some legal experts have already argued that if the Government abolishes gift duty, then it must amend the law to allow the courts to order a division of trust capital to achieve a fair and equitable settlement. My question to the Minister again is whether his Government will amend relevant law to achieve that purpose. I have outlined what George Tanner QC cited as why New Zealanders are so passionate about establishing trusts. This is all about trusts. Indeed, the general election this November is about trusts. Thank you.
PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this
It is a real pleasure to take a short call at this time of night on the Taxation (Tax Administration and Remedial Matters) Bill. We have heard why this legislation is being put forward. It is about abolishing gift duty and about the sharing of information between Government departments, which will lead to more effective outcomes for the Government.
We have heard tonight from speakers opposite why they are not voting for this bill. We heard them say that gift duty raises $1 million for the Government and it costs the Government $430,000 in added administration. However, the private sector spends up to $70 million on compliance. We heard the last speaker, Raymond Huo, say that is no reason to change the law. That is unbelievable. Those members wonder why they are sitting in Opposition, when there are effective compliance costs of $70 million and they do not want to change the law.
We heard his colleague talk about incest and we heard him talk about Filipino wives. We heard him talk about income splitting, which is not within the realms of this bill. And those members wonder why they are sitting in Opposition. It is because of the financial illiteracy and incompetence that has been demonstrated tonight from that side of the House. They will bring out their policy of a capital gains tax tomorrow, yet they do not understand that $70 million of compliance costs going to lawyers and accountants is a waste of money.