Dalziel Lianne: Taxation (Tax Administration and Remedial Matters) Bill — In Committee Third Reading 
Dalziel Lianne: Taxation (Tax Administration and Remedial Matters) Bill — In Committee Third Reading 
[Volume:675;Page:20768] 
Hon LIANNE DALZIEL (Labour—Christchurch East) 
: 
 I want to follow on from the Minister of Revenue’s comments and also those of some of my colleagues. I now have a copy of the regulatory impact statement in front of me. I enjoy reading regulatory impact statements but this one is of particular interest to me because now I understand why the Finance and Expenditure Committee was concerned about it. I want to read a paragraph from it then reflect on another element of it because it has a detailed analysis of where this $60 million to $70 million has come from. “We recommend that gift duty be repealed on the basis of enhanced efficiency simplicity and administrative costs and the significant reduction of private sector compliance costs (although fiscal cost is also a relevant consideration). 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.” 
What is also instructive—and I am so glad I was referred to this—is the Government agencies that Treasury and the Inland Revenue Department consulted on this measure. There were the obvious ones—the Ministry of Economic Development the Ministry of Justice the Ministry of Health the Ministry of Social Development and the Housing New Zealand Corporation because they are all relevant—but also the New Zealand Police. I think the New Zealand Police is in that mix because of the whole risk area around money-laundering. I think the Minister should give us a little bit more of a discussion point around what these different Government agencies have done or are planning to do in order to address issues such as income tax minimisation social assistance targeting fraud and defeat of creditors. I would have thought defeat of creditors would be a matter of significant substance for the Government to consider in these circumstances. 
I come to the question of how much this measure will save the private sector. Various Government members have chipped across the Chamber about how much it is costing the private sector to be exposed to the gift duty regime. I could not quite understand where the compliance costs of $70 million had come from but now I do understand. So I would like to take the time of the House to explain very carefully where the $70 million comes from. 
Under standard gifting programmes to family trusts a number of deeds are required that must be filed with the Inland Revenue Department in addition to gift statements. Initially a deed of sale is required when the asset is transferred to a trust. Then a deed of acknowledgment of debt is drawn up and annual deeds of forgiveness are required to reduce the outstanding debt. The average cost quoted by practitioners is $285 plus GST to draw up the annual deed of forgiveness and to file it along with the gift statement. If this cost is grossed up to reflect the 225000 gift statements filed each year it reveals more than $70 million in annual costs to the private sector excluding the initial costs of setting up the gifting programme the deed of sale and the deed of acknowledgment of debt. Well I find that extraordinary. I do not know whether others find that extraordinary as well. But what the Government is essentially accepting as the basis for its claim that this measure will save $70 million is the fact that the regime we have in place at the moment actually allows only $27000 per year to be transferred without any tax being paid and what the Government wants is for people to be able to transfer the lot instantly in 1 year with no tax implications whatsoever. That is exactly what will happen and that is exactly what the legislation was kept in place to ensure would not occur for a whole lot of other reasons. 
I recognise that the social assistance targeting does use a different set of criteria and often it is the conflict between the criteria that confuses people. They think they can gift up to $27000 a year or forgive $27000 a year of a loan but in fact the social security amount will be $5000 a year. Of course the department can go back year after year over 5 years to look at whether a person has deprived themselves of an asset. 
I remember when the surcharge was in place. A relatively new member of Parliament at the time who had come in at the same time as me one Michael Laws went around the country explaining to people that they could enter into a gifting programme in order to avoid paying the surcharge. He basically said that for 5 years a person had to gift up to $5000 a year but once they had got past those 5 years where the claw-back applied they could gift up to $27000 a year without any worry in terms of shifting that asset. So in actual fact there will be situations where the Government is saying that it will make it absolutely crystal clear that there is no limitation in terms of the transfer of the asset other than changes that may be made directly to the social security scheme as well. 
I have not gone into the question of the creditors because I am a little bit worried about where that might take us. When the Government of the day repealed the estate duty the gift duty it said was retained for an interim period but what I am really unclear about is what processes have been put in place in order to secure those three areas: first the social security regime; second the protection of creditors which is the one that particularly concerns me; and third the area of protection in relation to the question of the means-testing regimes that might apply and also to other areas of income tax. What I am unclear about is whether the Government has actually taken that additional step to provide for this coverage. 
I do not believe that it is unreasonable for the Opposition to want to see something a little bit more than the regulatory impact statement that has been prepared. What the Government has not said is why it thinks it is acceptable that entire assets can be transferred with no implications for taxation or any other purposes. Why is that the driver? It seems to me that having a regime in place that allows an asset to be transferred without tax implications at $27000 a year does stop people from potentially income splitting. It stops people from potentially transferring major assets over to the ownership of someone else in order to avoid something that they themselves find they are subject to. If it really is to protect themselves against creditors then that obviously is a major worry to all of the SMEs—the small and medium sized enterprises—from one end of the country to the other that find themselves at the end of queue after queue after queue trying to get money off people who have declared themselves without assets. They are unable to claim their asset off them because they have transferred it in one fell swoop rather than having to go through this gifting regime. I do not think the Minister has taken seriously enough the issues we have raised. I hope he will take another call actually work through each of those different areas and explain to us what steps the Government has asked each of those departments to put in place to make sure that this measure does not have the impact that I think the regulatory impact statement has alerted the House to. 
When the regulatory impact analysis was done there were five options put forward for the Government’s consideration. I want to know why this particular option was the preferred option. I turn particularly to the question of creditor protection. There is a view that creditors are given some protection by gift duty because defaulting debtors are unable to transfer assets out of their name without either becoming liable for gift duty or entering into a gifting programme. I guess that is one of the advantages of the system as it is at the moment. It is not so much the amount of tax that it collects; it is the fact that people construct their gifting programme over a longer period of time in order to avoid paying the tax. So in fact not paying the tax is part of what it is designed to achieve. The regulatory impact statement talked about the result of gifting programmes being that the person who is transferring an asset receives a corresponding debt asset by virtue of the interest-free on-demand loan that is exchanged with the recipient in satisfaction of a market value sale. The diminishing amount of the outstanding debt remains because it can be forgiven only at a rate of $27000 every 12 months in order to avoid gift duty. I am aware of some instances where the issue has arisen that the $27000 has been gifted within a 12-month period—because it is not a calendar year; it is a 12-month period. I know a constituent who entered into a gifting arrangement where they were on one side of the line instead of the other. It was in the next financial year but was within the 12-month period. But anyway they had managed to get themselves in a bit of bother over that. 
But the point was that a debt valued at $1 million would take an individual 38 years to completely forgive if one was avoiding gift duties—if that was the point of it. The unforgiven portion of a debt under a gifting programme can be demanded in order to satisfy creditor claims against the transferor. If gift duty is repealed gifting programmes will no longer be necessary because the value of allowable gifts would be unlimited. Therefore when a person transfers a large asset there will no longer be any portion of its value immediately available to be clawed back. I think this is a serious issue. It is probably one of the most serious issues and that is because obviously an official assignee looking at a bankrupt situation would be able to use this as some leverage. 
Sitting suspended from 6 p.m. to 7 p.m. 
Hon LIANNE DALZIEL 
: I was talking about creditor protection concerns and referencing the regulatory impact statement that accompanies this legislation. I had just got to the point where I was identifying how the officials who wrote that report had decided that that would not be a major problem. Essentially it was because people involved in gifting arrangements were not going bankrupt left right and centre and therefore it could not possibly be a problem. But my problem is that this gifting programme allows gifting of $27000 a year. People who do not care about the tax implications can simply gift an entire property and pay gift duty on it but people who want to avoid paying gift duty simply have to limit gifts to $27000 a year. Somebody who was coming up to bankruptcy would have the ability to gift away an entire asset and therefore take it outside the disposition provisions of the Property Law Act. That is an issue that is raised in the regulatory impact statement. It talks about the change of the wording in that Act from “intention to prejudice” to “intention to defraud” and the fact that those words have not been defined by the New Zealand courts. Given the lack of clarity this is something we will have to keep an eye on. 
The areas of potential risk for the Government are listed in quite some detail in the regulatory impact statement and I will come back to that in a later call but I will just talk about the Ministry of Social Development benefits the residential care subsidy the Working for Families tax credits student allowances State housing legal aid—and the Government has a legal aid bill before the House; it very narrowly passed its first reading last night—child support relationship property disputes enduring powers of attorney and trust law concerns—