by Russel Norman
The Green Party opposed the first reading of the Taxation (Tax Administration & Remedial Matters) Bill last night on the grounds that the Bill will abolish gift duty—a left-over tax from a time when New Zealand had estate duties.
Gift duty was designed to prevent people giving away all their wealth on their death bed to avoid paying estate duty. Estate duty was abolished in 1992.
Inland Revenue estimate that New Zealanders today spend up to $70 million a year on fees to set up gifting programmes to avoid paying the duty. (Gift duty kicks in when people gift more than $27,000 per annum.) As a result, gift duty only raises $1-2 million in tax revenue each year. If you believe IRD’s figures, gift duty is a very inefficient tax that serves only to make lawyers and accountants rich, so shouldn’t we get rid of it?
Maybe, but tax efficiency isn’t the only way to measure the worth of a law. Gift duty has incidentally acted as a check on the amount people can move into tax avoidance vehicles like trusts. Trusts can be used for the purposes of tax minimisation, defeating creditors, lowering personal worth to qualify for Working for Families, or depriving partners of their matrimonial property rights.
The extent that trusts are being used for such purposes is not yet known. The Law Commission is currently reviewing trust law but this Bill will precede their eventual findings by over a year.
The Government clearly has the process all wrong; they’re abolishing gift duty before they understand the way it’s acting as a check to all kinds of bad behaviour. Abolishing gift duty poses a real risk to the tax base; this Government is acting with imprudent haste.
Finally, the IRD’s own comments on the move are worth noting:
We believe that gift duty does not fulfil its current objectives and the risks of its repeal are low. However, it is not possible to precisely determine the extent to which gift duty alleviates issues such as income tax minimisation, social assistance targeting and defeat of creditors. Therefore, it is important that affected government agencies monitor the effects of gift duty repeal on their areas and make any necessary operational changes.
The Taxation (Tax Administration & Remedial Matters) Bill hasn’t a single special monitoring provision to ensure the abolition of gift duty isn’t detrimental to the integrity of the tax base. That’s simply inexcusable.
Published in Economy, Work, & Welfare | Featured by Russel Norman on Thu, December 9th, 2010
Tags: gift duty, IRD, tax avoidance, tax minimisation, Taxation (Tax Administration & Remedial Matters) Bill, trust law, trusts
More posts by Russel Norman | more about Russel Norman
on the trolls and those who are unable to keep on topic
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Many people see these as advantages rather than as problems.
Now can we repeal the cheque tax too please?
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So we’re making it easier for those who set up finance companies to appropriate all the paper profits and run off with the investors money to do so?
We should in fact be establishing an Assets Tax to tax the wealth (including that in Trusts) created by the lack of a historic CGT and establishing a CGT.
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oh dear, Asset Tax to tax wealth.
Questions. Who sets the value of any asset? Are depreciation costs factored in? Will there be allowences for assets in production now that maintain jobs? Will new plant and equipment intended to produce new jobs and wealth be taxed on the value? Will an asset tax encourage investment (the lump sum sitting in the bank will be taxed as will the asset puirchased with that lump sum).
And lastly define an Asset.
Will it include the family car for example. How about the lawnmower?
Like GST, unless the asset tax is fully inclusive it will be full of loopholes.
Then there are the fine print details. Will the family car value be taxed yearly? Will the factory owner be taxed yearly on the value of the asset?
One only has to look at the poor job SOE’s have done at valueing their assets to realise that asset valuation is haphazard and not a very exact science.
http://www.nzherald.co.nz/economy/news/article.cfm?c_id=34&objectid=10693028
So many reasons not to have an asset tax.
Maybe we should look at reducing state expenditure to negate the need for costly to collect, asset taxation.
Now that would be novel.
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So how would you increase revenue to balance the budget? If requiring some contribution from those with existing asset wealth whenever there is a budget deficit is so problematic in your eyes, what’s easier then?
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Easiest to balance the budget is to cut state spending. Just like any household would do. Only spend what you have coming in through cashflow (taxation).
Simple so simple.
Like Italy, Ireland, Portugal, Spain, Greece, UK, Benelux countries, etc. are doing.
Perhaps you need to explain what is asset wealth is.
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Gerrit – why ignore the fact that their programes include increased tax revenues, not just budget cuts? Why not note that all of the countries you mention will have larger deficits, after their budget cuts, than we have now?
The USA which also has a higher budget deficit and public debt than us has no serious budget deficit programme whatsoever while choosing to continue with stimulatory tax cuts it cannot afford.
An asset for this purpose would be that held by a private individual – it could be wealth beyond an exemption for a family home and cars up to a certain value (as with the progressive taxation top rate – the question is where – above $500,000-750,000?).
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They only included the tax increases to ease the burden. Be interesting to see if their collection actually go up or not.
Does not address the asset valuations owned by companies. My company owns assets, not me. The only asset I have is the value of the income the company generates and I’m already taxed on that.
So will companies became asset wealth taxable? And at what value? Purchase price? Yearly valuation?
Maybe think this asset taxation a bit further. Any shining examples where it does work?
If asset wealth came in I would imagine most people, with the ability to set up companies and trusts, would set them up offshore and transfer the ownership of the asset overseas. Simply lease back from the overseas owner (themselves of course).
More money flowing out of New Zealand
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Most European countries are going for expenditure slashing, which I think for them, in their buggered state, is just what they need, and pretty much the only choice they have, unless defaulting is considered an acceptable option. We, on the other hand, need to improve our productivity significantly so that we have more GDP, and thus more of a tax take, and thus make our government spending affordable.
The difference between us and most European countries is that our productivity is so much lower than theirs (and generally getting worse every year) so we have a (quite attractive) option open to us that they don’t.
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I don’t think the Americans are special enough to cope with the public debt continuing at this level when they have social security cost coming due. They are in the area beyond Keynesian economics – irresponsibility.
Whereas with most of our debt in the private sector we need more Keynesian insight in the public sector and some rigour in the private economy.
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Gerrit, I only propose an assets tax/wealth tax on private individuals.
As for transferring personal assets into a company – then the company can pay company tax on rising share values and rising rental property values then.
PS I don’t support foreigners or foreign companies owning housing or land in New Zealand.
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Not going to generate much revenue as most if not all individuals holding any wealth already has that tied up in companies (generating jobs and productivity increases) or trusts.
That horse has long bolted.
Sure the NZX will be keen to hear youw want to tax share value rises and the IRD will be glad that they have to refund tax for share value drops.
Same goes with rental property values. Property values are dropping so a myriad of tax refunds are on the cards. Whoopy.
Glad I invest in the ASX.
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SPC – as long as the world continues to buy oil, and the USD is the worlds favorite reserve currency, the Americans are untouchable.
Paradoxically, I suspect peak oil will (at least for a good few years) be good for the USD, as oil becomes even more expensive, the product of volume x price will be even greater than it is today, even with declining volumes.
So the USD maybe is off the sanity chart, but thats OK; they can get away with it. You think China is going to turn up at the US embassy door with $1T of bonds they hold and demand repayment?
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Gerrit, how would there be any liability for falling share or property values with an Assets Tax on privately owned shares or rental property? There could only be a decline in the tax collected as is occuring in other tax revenue areas at the moment.
As for a CGT – IF it were retrospective most would still have a taxable CG. Of course it would not be restrospective and thus the recent dip off peaks would have little impact on the (future) rising trend.
Of course companies already pay tax on their CG, and Trusts are taxed at the company tax rate are they not?
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The Japanese have very low interest rates and thus public debt is very low cost – thus their debt is very high. Thus they are similarly immune from the natural consequences of a rising public debt. Of course they only require more people to join the workforce and this pyramid scheme to keep it going. But their population is aging and not growing – rising retirment costs to come with fewer people working and saving. So there is a brick wall at some point.
The reserve currency line … at some point owning the worlds cash reserves will mean something – IMF/World Bank etc. Just imagine the Chinese learning from the banks of recent years and setting up financial instruments to realise a purpose. How about backing a new international basket of currencies with all the dollar debt they own? The American military has to be slashed so the Americans can afford to borrow at new global interest rates to cover their public debt cost. Peace in our time … everyone operating in the market place under the same rules.
China simply saves its way to regional hegemony. No US Super Power the Far East and South China sea containment is over.
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Russel, I would suggest that the main reason why people put their assets into trusts is to protect them from outside parties like you mentioned above. I doubt that tax minimisation even comes into it for many people, and the Pebbles and Hooper case would probably defeat that aspect anyway.
The problem is that in this day and age, the courts have become far too tough on people who make minor mistakes, and thus people see a need to protect their own assets from the risk of lawsuits. It is even worse in matrimonial issues when you might have someone who entered into a matrimonial relationship (usually a male) with a lot of assets and loses a lot of that through the divorce process.
Add to that, the fact that banks require personal guarantees for company debts, and the attractiveness of trusts increases significantly.
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SPC,
The tax rebates arise when the sharews or property are sold at below purchase price and below valuation for asset taxation. The Value of the shares/property are lower then the taxable value so therefore a rebate for the difference is in order for the length of ownership.
Or are you suggesting that the taxation be at kept at the original purchase value for the duration of ownershiip?
If alternatively you are going to increase the taxes IF the asset appreciates, are you sugesting there is no refund on the overtaxation from the actual market (sales) value realised?
If the Greens want to make this their policy go ahead, should make an interesting election promise.
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SPC,
For example.
One owns a property bought for $900K.
Asset taxation has been based on the $900K.
At sale the property realises just $600K (for whatever reason, morgage sale, divorce settlement urgency, deceased estate, etc.) .
Should the taxation be judged through the term of the onwership at $900K or $600K.
Gets very messy and complicated. Not only are you suggesting that there be a capital gains tax (or refund if the sale is below purchase price) but now also a tax on capital itself.
Good luck with that thought.
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Gerrit, an Asset Tax is applied at a low rate pa – just as was proposed with a 1% pa Land Tax. Changes in Asset value just change the amount of annual tax, what the purchase price is, or sale price is, is largely irrelevant – the current value applying each year (the latest valuation) is used. As I noted earlier it’s possible to apply such a tax only when there is a budget deficit and not apply it in any year when the money is not required.
Taxing the wealthy some more is not as difficult as some would try and make out. Why should the wealthy be exempt from some of the pain everyone else goes through when there arer budget pressures? And you do agree that budget deficits are not to be taken lightly – so why the problem with improving revenues to take up the slack when GST and company tax etc fall.
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Good call Russel!
Trevor.
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SPC, I can already see a big problem with that proposal. Let us take Joe and Jane Pensioner whose primary source of income is NZ Super, and who own their own home outright. If it were the median house price in Auckland (~$500,000), then you have just imposed a $5000 per annum tax on them. This would be the same for the tens of thousands of people who are in retirement at the moment.
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I was proposing an Assets Tax as a Wealth Tax to apply in years when we had a budget deficit (to compensate for falling revenue from GST and company tax etc) – in part because of a historic lack of a CGT while people were acquiring this wealth. Thus, as with a Rates Rebate (which many people over 65 are eligible for) it is easy to protect those on low incomes and few assets other than the family home from the full impact either by exempting the family home or the first $500,000 of Assets.
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Trust reform is the way to deal with these sorts of issues not keeping a ridiculous tax…
There is nothing wrong with tax minimisation – quite the opposite, trusts can be clawed back if used to try and defeat creditors – this should be extended, the answer to get rid of the WFF problem is to eliminate WFF and introduce a tax free threshold, finally when setting up my trust I was advised that if I got married and kept “my trust rich” and “my marriage poor” a Judge would invalidate it…
There is no reason to oppose the elimination of a tax bringing in 0.0014% of the budget…
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“far too tough on people who make minor mistakes, and thus people see a need to protect their own assets from the risk of lawsuits”.
This is why private trusts should be abolished. The only reasons for them to exist is to avoid responsibility for you actions, avoid paying suppliers and subs if your business fails, avoid paying a fair share of tax or avoiding paying a fair share on a marriage breakup.
It makes a mockery of some business owners claims that they deserve more money because they took the risks to start a business and employ people. It is their employees, subbies and creditors who were actually forced to wear the risk as they escape with their trust assets. Sometimes more than once.
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Jeremy,
I think Russel is open to eliminating gift duty…just not before said trust reform that you speak of. The order is pretty important here.
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Kerry, the problem with that analysis is that you are ignoring reality. Professionals can get sued heavily for simply making comments that are relied on by others even when it wasn’t their intention. Should they really lose their house or savings for such a comment? If a businessman takes a risk, sets up a business and due to an economic downturn the company closes down, should they lose their house? If a person enters a marriage with significant assets and supports the wife to boot, should they lose half their pre-marital assets?
If you answer any of these yes, then it is clear that you have something against the professional classes and entrepreneurs.
Kerry, they still took a risk though. In the first instance, they removed themselves from the workforce – if your business collapses a few years after founding, then you run the risk of not being able to re-enter the workforce, and even if you do, then your chances of getting back to the sort of position that you were at are relatively slim. In the second instance, banks are increasingly requiring personal guarantees with the threat of bankruptcy to the individual if the company goes under. Even if you have a house in a trust, you still have the bankruptcy to your name, and it is very difficult to get credit at a favourable interest rate if you are a discharged bankrupt. Of course, with many SMEs, the owner also put in a lot of their own money in order to get the business off the ground – losing tens of thousands isn’t exactly easy.
I see trust law as a pendulum. At the moment, it is at one extreme. You are proposing to go to the other extreme. I am personally in favour of something in the middle – something that the deceitful cannot abuse in order to get away with heinous acts, but something that ensures that people don’t lose their houses because they made a minor comment.
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“Kerry, the problem with that analysis is that you are ignoring reality. Professionals can get sued heavily for simply making comments that are relied on by others even when it wasn’t their intention. Should they really lose their house or savings for such a comment?”
Professionals can and should have public liability insurance for mistakes.
In fact in NZ so called professionals are not held to account enough.
“If a businessman takes a risk, sets up a business and due to an economic downturn the company closes down, should they lose their house?”
If it is my decision to go into business and if it fails then why should my employees, suppliers or subbies wear the consequences while I still have money left to pay them
“If a person enters a marriage with significant assets and supports the wife to boot, should they lose half their pre-marital assets?”
You should be trying to get the law that does that changed rather than supporting trusts as a way of avoiding legal obligations.
“If you answer any of these yes, then it is clear that you have something against the professional classes and entrepreneurs”.
Hardly. As I am both myself.
I know what it is like to start a business and what a struggle it can be.
I’ve been close to the bone myself. Mostly due to NZ’s exchange rate.
I still do not think I have a right to make others wear the consequences of my business decisions any more than I have to.
Obviously it is not always possible to make things right, but people who go bust leaving a trail of small businesses, investors and subbies bankrupt in their wake, while they keep their money in a trust, are criminals in my book.
If you take a risk yourself then it is your responsibility. Just as it is the responsibility of anyone who claims to be a professional to get their advice right. That’s why we get the big bucks.
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john-ston, is it really out of concern for pensioners to oppose an Assets Tax (an exemption for the family home up to $500,000-750,000 as I proposed to gerrit earlier includes those retired).
Lacking the revenue from an Assets Tax, whenever we had a budget deficit and pressure to cut costs or raise revenues – where would you do so instead or would you accept the budget deficit as a cyclical and pay down the debt later when we returned to economic growth?
Surely you would not raise the age for Super, or establish a Means Test etc if an impact on wealthier pensioners was the reason to oppose an Assrts Tax on the wealth?
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Jeremy, Trusts were popular long before WFF. And to remove WFF would increase the number of children in poverty (they are now nearly exclusively the children of families on main benefits, whereas before WFF they included the working poor).
It is simply not possible to have an income free threshold that provides the same support as WFF – as the latter is so much more targeted.
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john-ston and Kerry.
The best way to dump Trusts is to provide small business loan insurance -so these businesses can borrow without mortgaging their family home.
The problem with Trusts is that inherently risky business such as finance companies are set up by people who place their profit dividends into these Trusts in the good times (without providing adequately for bad debt risk in any property market downturn) before the company goes under (so investors have all the risk).
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So the Securities Commission has frozen Hotchins New Zealand assets (including Trusts) – one wonders how that will impact on his asset sale choices in the near future (Oz or USA/Hawaii?). Or the financial planning of Watson?
The FMA should be assisted by legislative change with teeth, not just the ability to act on behalf of investors (the Stock Exchange and law suit firms that protect business crooks – those with ambition to acquire, or a record of “stolen” property/wealth/assets/money are squealing) – but hard law, where dividends paid out to owners of firms that then go under are repayable to cover creditors and the losses of investors. That will send the “businessmen” back into the criminal fraud arena from whence their ilk came.
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So professionals must be forced to pay for insurance to protect themselves? We all know the problems that has caused in the United States, and would it not be a lot fairer for those professionals to have a trust so that they don’t lose their house if they make a minor mistake?
Because under your scheme, there would be no enterprise – the limited liability company was probably one of the inventions that allowed the modern world to function so successfully.
Would you not agree that getting the law changed would probably reduce the popularity of trusts? Why not fix the law and allow trusts to remain?
The problem is that you are assuming perfection on the part of professionals. No-one is perfect, and thus they will always be vulnerable to lawsuits.
I would accept a deficit as cyclical and pay down the debt later. The problem at the moment is that the previous government failed to take the opportunity to improve the chances for economic growth and now we have to deal with the consequences.
I am in favour of a higher age for Super, largely on the basis that people are entering the workforce at a later age now compared with our parents and grandparents. If a Means Test were to be established, then I would hope that homes would be exempted – if that exemption did not exist, then we would merely see costs increase later as the elderly would have to eek away at the value of their home and then finally be forced to pay rent with our money.
Except that Working for Families comes with a massive bureaucracy attached to it. If you removed Working for Families, sacked all the bureaucrats attached to it and replaced it with a tax free threshold, then you would have a massive impact.
Which is why I believe that there needs to be reforms in that field. In my opinion, the law should allow for a court to find that someone was deliberately negligent (for instance, they deliberately built a leaky house, or they deliberately ran a company into the ground), and cancel the effect of the trusts and the corporate veil.
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john-ston – I would rather place an Assets Tax on all the wealthy of a country than apply a means test for Super (but I would only apply it while there was a deficit and I would exclude $500,000 or so for a family home).
As for the relative merit of WFF as per an income tax threshold. Even throwing in the costs of running WFF, there is no way an income tax threshold would come close to delivering the same gain for families – not unless they were on a real high income and had only one or two children.
As for the merits of insurance – what about leaky homes? Don’t you think building standards would have been maintained if there was liability?
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SPC, as you probably saw in my post, I am in favour of removing the effects of trusts and the corporate veil in cases of extreme negligence – for instance, leaky buildings, where the people would have known that using crappy materials was going to cause those problems.
Why would a zero tax threshold of let us say $10,000 only deliver gain for people on really high incomes? It would deliver a massive gain for people on low incomes as well; they would be getting a $1000 extra per annum that they didn’t get before (unless they got a Working for Families payment).
The other problem is that Working for Families provides for perverse incentives – not only do you face a higher marginal tax, but you also lose your payment.
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john-ston – yeah I know, single people get more and rich people would get more just as with any tax cut. But 90% of families get more via WFF. WFF ended child poverty amongst the working poor and most singles who intend to start a family realise they need the WFF help when they start families. And many older workers want their children to be able to afford to raise up their grand-children. WFF is so popular even National accepts it.
Now only the (non National) right remains fixated on the issue and some even promote the option of an income tax threshold to attract leftist support to end WFF. An income tax threshold promoted by the left would probably gather the money to fund it by increasing the top rate of income tax (probably adopt the Oz tax rates – adjusted for income difference – the upper levels). So it would be a simple transfer from the top group to the rest. Such a reform is required with more adults fewer hours.
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john-ston, you said you opposed insurance, and you also sais you liked the idea that limited liability companies should not be liable to creditors because of “failure”. I suppose the issue is where is “failure” a matter of marketplace business and where is it a failure to provide a professional standard performance of service. The latter requires some restitution to the victim of the failed delivery of performance – there should be guarantees and these require savings out of revenue/profits – insurance premiums. We need profesional groups to maintains standards and insurance is the way to go (after leaky homes …).
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