Repeal of Gift Duty Confirmed

Posted: 15th July 2011

The Taxation (Tax Administration and Remedial Matters) Bill has been reported back from the Finance and Expenditure Select Committee.  Whilst largely administrative in its nature, the Bill does contain the legislation required to repeal gift duty and the introduction of foreign investment Portfolio Investment Entities (PIEs) to allow non-resident investors to elect a 0% tax rate on their foreign sourced income.

 A number of concerns were raised around the proposed abolition of gift duty, particularly in reference to creditor protection and the proliferation of trusts in New Zealand.  However, the majority view of the Select Committee was that gift duty is not an appropriate mechanism to deal with any inadequacies in New Zealand trust law and that these had been addressed in the current Law Commission's review of trusts.  There are existing measures contained in the Companies Act, Insolvency Act, Property Law Act and Family Proceedings Act which are considered to provide protection from the issues raised.  Accordingly, gift duty will be abolished without any new measures being put in place to protect creditors or effected parties over and above the measures that currently exist.

Despite this change, we would emphasize that this should not mean that people gift all loans to their trusts immediately.  The wider picture needs to be taken into account as sometimes a person's loan account is their only asset.  Thought needs to be given as to the level of gifting required.

A final point of note is with respect to foreign investment PIEs.  A new class of PIE will be established where a non-resident investor can elect a 0% tax rate on their foreign sourced income.  This will bring PIEs more closely in line with the tax treatment of other investments for non-resident investors.

If you have any queries regarding the above, please contact Sudhir Lala on 09 308 4055 or Sudhir.lala@tbag.co.nz