Nash Stuart: Taxation (Tax Administration and Remedial Matters) Bill — Second Reading 
Nash Stuart: Taxation (Tax Administration and Remedial Matters) Bill — Second Reading 
[Volume:674;Page:20097] 
STUART NASH (Labour) 
: 
 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 $500000 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 $27500 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 $100000 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.