Dunne explains the reasons behind the govt's abolition of gift duty; Other departments will now have more work to do policing welfare programmes

By Alex Tarrant

Several government departments will have more work to do to police their welfare programmes after the abolition of gift duty, which had helped them with eligibility controls in the past, Revenue Minister Peter Dunne says.

The government last week passed a law to get rid of gift duty, which Dunne said raised only NZ$1.5 million a year in revenue, cost NZ$500,000 to administer, and cost the private sector NZ$70 million a year in 'compliance costs'.

Gift duty was clearly not a revenue raiser, with the argument that it was in place to deter certain types of activity irrelevant in terms of the revenue portfolio - moves could be made in other areas to deal with welfare arbitrage.

'Do your own policing'

In an interview with interest.co.nz after passing the law, Dunne gave his reasons for getting rid of the tax, saying government did not “get a hell of a lot out of it.”

"We looked at this originally from the perspective of maybe it was time, since it was last done in 1984, to review the thresholds [for gift duty up]. That was where this exercise began. It became clear during it, why waste your time reviewing the thresholds, this thing’s a dog...just get rid of it," Dunne said.

Gift duty was "clearly not a revenue raiser". 

"The point that was argued to us was that it was there to stop people misusing social assistance provisions, or other income and asset-tested government services," Dunne said.

"We thought, well hang on, all of those things, whether it be in the health area or the social welfare area are all governed by existing legislation. When we discussed with those agencies the capacity of their legislation to deal with the problem, they all said ‘yes we could do that, but it’s much easier with gift duty – basically we don’t have to worry,’" he said.

"We thought, well hang on, if we’ve got laws that say you can set conditions about eligiblilty, that’s where you should be targeting your focus, rather than just relying on something like gift duty to stop them.”

That would mean other departments would have to ramp up their policing of their own programmes.

“It became clear to us that they already have the powers, but effectively have chosen not to exercise them with a great deal of commitment, because, ‘why bother – gift duty picks it all up for us’. We thought, well, this is a bit silly maintaining this crazy system when you’ve already got the power to do it yourself anyway,” Dunne said.

The “classic” example of this arbitrage was people manipulating their asset base in order to qualify for long-term geriatric care subsidies.

“They get their income down to the lowest possible level to make themselves eligible for those subsidies," Dunne said.

"The existing legislation that MSD [Ministry of Social Development] has in place allows them to look at people’s assets and look at people’s circumstances to determine their eligibility. They were simply, not-so-much choosing not to do so, but basically weren’t paying a great deal of attention to that because, after all, the gift duty rules effectively covered their concerns," he said.

Asked whether this move would therefore cost other departments more, Dunne replied:

“Well it’s going to mean that they’re going to have to enforce their own legislation.”

'Won't lead to increased use of trusts'

“The argument comes down to, why gift duty? No one to my knowledge has argued we should be retaining this for revenue-raising purposes. In fact, in the debate [in Parliament last week], Labour was saying its purpose wasn’t about revenue," Dunne said.

“My argument is, well it’s revenue legislation, that’s our focus - we don’t have a broader focus than that. If there are other enactments that deal with the same issue, then that’s where we should be putting our attention," he said.

"You come back to saying, well, ok, let’s look at things like social assistance legislation. Some of the work we’re doing - which we’ve done in the last year and we’ve got on-going work on the definition of income for social assistance purposes - that’s where the focus should be, rather than relying on a tax that’s essentially outmoded.”

Dunne said he did not buy the Opposition’s argument the abolition of gift duty would lead to increased usage of trusts.

“Firstly, I think that the avoidance potential of trusts has been significantly blunted by the moves last year to equalise the taxation rates, so that there’s no great tax advantage in having assets in a trust now. Also, the Law Commission’s work on the whole regulation of trusts is likely to see stronger moves in this area as well anyway,” he said.

That review by the Law Commission was “some months off yet”.

A risk to this would be a re-raising of the top personal tax rate – something the Labour Party is proposing (a 39% rate for those earning over NZ$150,000).

“If they re-instate the differential, then all of the explosion we saw during the first years of this century in terms of the use of trusts will return. What I suspect they may well do, if they got in to that position, would be to say, well we’re not re-instituting the differential, we’re simply going to put the trust tax rate up to match the top personal tax rate," Dunne said.