Gift duty exemptions
(Clause 82)
Summary of proposed amendments
The bill introduces a number of amendments to the Estate and Gift Duties Act 1968 to exempt the following gifts from gift duty:
- Transfers of assets by, and gifts made to, local or central government. The change removes an impediment to donors who want to give property (monetary and non-monetary) to local or central government and will reduce the associated compliance costs for those donors.
- Gifts made to donee organisations. [1] The change will align the gift duty treatment of gifts made to donee organisations with the policy for encouraging greater giving to charitable and philanthropic causes.
- Distributions of property made in accordance with a Court order under the Law Reform (Testamentary Promises) Act 1949 or the Family Protection Act 1955. The change will ensure that the original policy intention that such distributions of property are exempt from gift duty is maintained.
Application dates
The exemption for distributions of property made in accordance with a Court order under the Law Reform (Testamentary Promises) Act 1949 or the Family Protection Act 1955 will apply retrospectively to 24 May 1999, the date when Part 1 of the Estate and Gift Duties Act 1968 was repealed.
The other amendments will apply from the date of enactment.
Key features
New section 73(2)(aa) of the Estate and Gift Duties Act 1968 exempts any gift required by an order of a Court under the Law Reform (Testamentary Promises) Act 1949 or the Family Protection Act 1955 from gift duty.
New sections 73(2)(jd) and 73(2)(kb) introduce exemptions from gift duty for gifts made to central government and local authorities, provided these organisations are not carried on for the private pecuniary benefit of any individual.
New section 73(2)(o) introduces an exemption from gift duty for gifts made to donee organisations.
Background
Gift duty was introduced in New Zealand in 1885. [2] The original purpose of gift duty was to protect the estate duty base (by discouraging the gifting of assets before death) and to raise revenue. However, when estate duty was abolished in 1992, the government of the day decided to retain gift duty to protect against income tax avoidance, social assistance targeting and defeating creditors, until measures to restrict avoidance were considered and announced.
The way the Estate and Gift Duties Act 1968 is currently structured means that gift duty has a wide ambit. This is because gift duty is imposed on any gift of property in New Zealand, or outside New Zealand if the donor’s permanent home is in New Zealand, or the donor is a company incorporated in New Zealand. A number of exemptions from gift duty are provided in section 73 of the Act. The exemptions are, however, ad hoc and there does not appear to be a coherent framework for determining whether exemptions should be granted. Consequently, the Minister of Revenue receives frequent requests for legislative change to exempt certain gifts.
Instead of continuing to determine exemptions on a case-by-case basis, a review of gift duty, focusing on options for targeting the application of gift duty, will be undertaken in the coming year. The review will seek to ensure that the government’s intention for gift duty as a means of protecting against income tax avoidance, defeating creditors and social assistance targeting is met, and to ensure that the integrity of the tax system is maintained.
Given that further work on reviewing gift duty is likely to take time, current requests for exemptions are being included in this bill. These relate to: transfers of assets by, and gifts made to, local or central government agencies; gifts of money made to donee organisations; and distributions of property made by a Court order under the Law Reform (Testamentary Promises) Act 1949 or the Family Protection Act 1955.
Detailed analysis
Transfers of assets by, and gifts made to, local or central government
Requests for exemptions for transfers of assets by, and gifts made to, local and central government fall into the following four categories:
- Transfers of assets by local authorities – local authorities often transfer assets as part of local council restructurings which can give rise to gift duty. Restructuring transactions to deal with the actual or potential imposition of gift duty is inefficient for local authorities.
- Gifts made to local authority trusts – the general characteristics of local authority trusts are that the sole trustee is a local authority and trust funds are held for charitable (or public) purposes benefiting all or a significant portion of the public within the territory of the local authority. Gifts made to these trusts may give rise to gift duty because of the legal uncertainty of such trusts registering with the Charities Commission.
- Gifts made to local or central government – uncertainty arose for a donor who proposed to gift a number of parcels of land to both local and central government agencies, and wished to ensure that such gifts were not subject to gift duty.
- Gifts made to district health boards (DHBs) – DHBs are Crown entities owned by the Crown. [3] For income tax purposes, Crown entities are treated as public authorities and are therefore exempt from income tax. [4] However, gifts to DHBs may be liable for gift duty. For example, a donor who wishes to gift a dialysis machine to a DHB may face potential gift duty.
Granting specific legislative exemptions for transfers of assets by, and gifts made to, local or central government agencies can be justified on the grounds that the proposed exemptions would:
- be consistent with the government’s intention in retaining gift duty for protecting against income tax avoidance, social assistance targeting or defeating creditors;
- remove impediments to donors to give property (monetary and non-monetary) to local or central government. Currently, donors making such gifts are subject to gift duty. The Crown is therefore the recipient of both the gift and the duty;
- be consistent with other exemptions contained in the Estate and Gift Duties Act 1968. For example, of the 12 named organisations listed in section 73 of the Estate and Gift Duties Act, three are Crown entities (New Zealand Antarctic Institute, Te Papa and the Historic Places Trust);
- reduce compliance costs for donors wishing to make gifts to local or central government as restructuring such gifts to ensure that they do not incur gift duty is currently resource-intensive and inefficient.
To ensure that the proposed exemptions are properly targeted, there will be a requirement that no person should be able to derive a private pecuniary benefit from a local or central government agency, over and above what would normally be permitted, and no person should be able to influence the amount of any benefit they themselves would receive.
Gifts made to donee organisations
Individuals, companies and Māori authorities qualify for tax relief on gifts of money made for charitable, benevolent, philanthropic or cultural purposes within New Zealand, or for certain purposes overseas. However, the exemption from gift duty applies only to gifts that are made to organisations registered with the Charities Commission. Consequently, donors may be entitled to a tax benefit for their gifts to donee organisations but are then subject to gift duty. This outcome has been criticised as being inconsistent with the policy for encouraging greater giving to charitable and philanthropic causes.
To ensure that the proposed exemption is not subject to abuse, there will be a requirement that no person should be able to derive a private pecuniary benefit, over and above what would normally be permitted, and no person should be able to influence the amount of any benefit they would receive.
Distributions of property made by a Court order under certain Acts
In 1993, estate duty was abolished for deaths occurring after 17 December 1992. Legislation affecting this matter was passed under the Estate Duty Repeal Act 1999, which provided for the repeals of parts 1, 2 and 3 of the Estate and Gift Duties Act 1968.
Under repealed section 7(2) of the Act, it was clear that the distribution of any property in accordance with a Court order under the Law Reform (Testamentary Promises) Act 1949 or the Family Protection Act 1955 was exempt from gift duty. Since the repeal of that section, the gift duty treatment of such distributions has become unclear.
Since such distributions have previously been treated as exempt from gift duty, it was an unintended consequence of repealing section 7(2) of the Estate and Gift Duties Act 1968 that the treatment of such distributions has become unclear. Given that the original policy intention of the Act was that such distributions be exempt from gift duty, the amendment will be made retrospectively to 24 May 1999, the date when Part 1 of the Estate and Gift Duties Act 1968 was repealed.
1 A donee organisation is an organisation that is approved by Inland Revenue and listed at www.ird.govt.nz/donee-organisations, or that is approved by Parliament and listed in schedule 32 of the Income Tax Act 2007.
2 The legislative provisions at that time were contained in the Deceased Persons’ Estates Duties Act 1885 and are now contained in the Estate and Gift Duties Act 1968.