Law Society says abolition of gift duty raises some issues

25 February 2011

Law Society says abolition of gift duty raises some issues

While the New Zealand Law Society does not oppose the repeal of gift duty, it is concerned that the current abolition plans could have a negative impact on relationship property rights and succession claims.

In its submission on the Taxation (Tax Administration and Remedial Matters) Bill concerning the proposed repeal, the Law Society says abolition needs to be considered beyond the context of income tax, creditors and social assistance.

It says repealing gift duty will render legislation which currently provides remedies to protect relationship property rights and succession less effective, and in so doing undermine the social aims of those Acts.

“The Society considers it is important that legislative amendments are made to restore protection under those Acts,” it says.

The Law Society says it agrees that repeal of gift duty does not affect the principles underlying the Acts, which allow owners to deal with their assets freely until a relevant event occurs. However, the effect of gift duty has been to enable those Acts to have some practical effect when the relevant event occurs.

“The general susceptibility of asset transfers to gift duty slowed down the alienation of assets, thus (for a period) preserving property against which claims under those Acts could be made,” the submission says.

Although the Inland Revenue Department’s regulatory impact statement says there is already “adequate protection”, the Law Society says it is not satisfied that the existing remedies are adequate. It says the repeal of gift duty is likely to render the remedies even less effective.

“The procedural safeguards that Parliament saw fit to impose on parties wishing to contract out of the Property (Relationships) Act 1976 do not apply to dispositions to trusts or companies. Unless these dispositions are made with the intent of defeating the relationship property rights of a spouse or partner, they are safe from attack under the Act,” the submission states.

“The current remedies to protect relationship property rights are far from adequate. The repeal of gift duty is likely to render those remedies even less effective, thus further undermining the social aims of the Property (Relationships) Act.”

The Law Society says the regulatory impact statement also incorrectly suggests that there is adequate protection in the Family Protection Act 1955 to prevent or remedy the effects of a disposal of property that defeats a claimant’s rights.

“The Family Protection Act was introduced to prevent family members from becoming dependent on the State for support. If owners are able to dispose of their assets easily, whether to trusts, to companies or to others, dependent family members may once again have to look to the State for support.”

Looking at practical solutions, the Law Society recommends that the Finance and Expenditure Committee considers the implications the repeal of gift duty will have on the Property (Relationships) Act 1976 and the Family Protection Act 1955. It also recommends that the committee considers what legislative amendment to those Acts might be required to afford adequate protection to prevent or remedy the disposal of relationship property to a trust or company that has the effect of defeating a partner or spouse’s rights and/or interests.