Posts Tagged ‘Peter Dunne’
A note to confirm that the legislation to abolish Gift Duty has been passed, so your time consuming and costly gifting programmes will not continue. Parliament passed the Taxation (Tax Administration and Rememdial Matters) Bill today, so gift duty will be a thing of the past from 1 October 2011 in New Zealand.
This legislation has not received the Royal Assent yet (perhaps one of the first pieces of legislation for Jerry Mateparae to assent) in light of him being sworn in yesterday, replacing 5 years of magnificent service from Anand Satyanand.
I think that this is great legislation and will save tens of thousands of New Zealanders hundreds of dollars every year from transferring their assets into their trusts. Well done Peter Dunne who championed this through and the National and ACT parties for their keen support.
Soon Gift Duty will be a thing of the past, as it gets abolished in New Zealand on 30 September 2011
Today’s Gift Duty Announcement by the Honourable Peter Dunne
The Minister of Revenue, the Honourable Peter Dunne has just today confirmed the Government’s intention to abolish gift duty, saying the decision would be welcomed by taxpayers generally as the rules were resulting in a high level of compliance costs and were no longer raising any significant revenue.
“Earlier this year I announced the Government’s intention to remove gift duty if concerns regarding creditor protection and social assistance targeting could be addressed.
Since my announcement there has been considerable work done by officials across government to assess the concerns. This work has revealed that the protection that gift duty offers in the areas of income tax, creditors and social assistance has only ever been incidental and very limited.
Furthermore, the limited protection that gift duty offers does not outweigh the significant compliance costs, estimated at approximately $70 million per year that gift duty imposes on the private sector.
There is a broad range of other existing legislation that will provide adequate protection to mitigate the identified risks following the abolition of gift duty. Government agencies will monitor the impact of the changes and a post-implementation review will ensure there are no unintended effects,” said Mr Dunne.
The abolition of gift duty will be included in legislation to be introduced in November 2010 and will be effective from 1 October 2011.
My Interpretation
This is great news as this was a costly and time consuming task for Governments and private citizens with Trusts alike. Only 0.4% (as per Inland Revenue) of the 430,000 entities (mainly family trusts) for which gift statements were filed from 1 July 2001 and 28 May 2010 actually paid gift duty upon filing their return. This means that 99.6% of entities had strong “gifting programmes” in place and paid no gift duty at all. What a complete and utter waste of time and money.
This was a very expensive revenue stream to administer and the net revenue foregone is projected to be less than $5 million of the next 5 years from abolishing gift duty. The annual gifting chore of having to pay professionals $180 – $500 to prepare a deed of reduction of debt (ie. gift) and gift statement, will be a thing of the past for many people and as a result some general practice and trust lawyers and accountants will see reduced fees. Lets face it, this wasn’t a “productive” aspect of work for New Zealand’s economy and despite having done more than my fair share of gifting as a tax and trust lawyer, I am glad it is gone. It will be of huge administrative convenience to do one deed of reduction of debt for say $270,000, rather than having to do 10 gifts of $27,000. I act a trustee for more than 3 clients with over $1.5 million still to gift. I know that they are extremely happy this duty is being abolished. They think this is long overdue and I couldn’t agree more!
I think that this is fantastic legislation and that the Peter Dunne (United Future party) and the National party should be praised for. I look forward to reading the Bill when the legislation is tabled for reading in Parliament.
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I am back from a cameo visit to Sydney today where I was a paid presenter for a six hour module on “Investing in New Zealand”. I was very interested to see the announcement from the Government that LAQCs which I knew were going to be abolished but thought they had left the door open for some offsetting of losses against personal income.
The writing has been on the wall for a long time for property investors using Loss Attributing Qualifying Companies (“LAQCs”). We know that the ultimate goal is to ring fence tax losses completely, so we property investors cannot use the LAQC ownership structure (our vehicle of choice) to offset rental property losses against or salary/wages. Investors should not be surprised about this, although the hopes of many appear to have finally been dashed with the hope that there would still be the ability to deduct tax losses against income from personal exertion to the extent of capital contributed or even more hopefully against the amount of loans personally guaranteed. Now the missing piece of the puzzle has been found – with the Minister of Revenue, the Honourable Peter Dunne saying this afternoon that “the Government would introduce new rules preventing loss attributing qualifying companies (LAQCs) from passing losses on to their shareholders.”
How did LAQCs become such a problem?
Lets look at this issue. I don’t use LAQCs myself, instead preferring the asset protection (creditor protection, succession planning) benefits that well managed trusts bring along, with some incidental tax benefits, since I am not ‘normal’ and like to buy properties that make me money. A lot of investors have bought on the rising market during the boom from 2003 – 2007 and fair few bought in 2008 thinking the market was just taking a short breathe before it would go up in value again.
The credit criteria for getting bank loans were very relaxed from 2004 until the Global Financial Crisis kicked into gear in New Zealand around September 2008. Investor friends of mine were able to get their effective tax rates down from over 33% to below 15% through rental property losses being attributed via the LAQC against their salaries. Instead of being net taxpayers, property investors (particularly residential property investors) became net taxrefundees! In 2003 before the last property boom kicked off there were $710 million of losses from LAQCs. This more than tripled to a significant $2.256 billion by 2008.
The Tax Working Group made a big thing of this in 2009, and the information they had from Inland Revenue and Treasury showed the last two years that property investors were making big losses, despite control what they perceive to be well over $150 billion worth of property.
As a result of the financial crisis affecting companies, reducing consumption spending, rising unemployment and lets not forget the fact that we have many hundreds of thousands of New Zealanders not earning a single cent who have been in increasing numbers totally dependent on Government handouts, our Government has been suffering reduced income, yet facing increased expenditure pressures. We are losing money to the tune of over $200 million per week. This has to be borrowed at interest from abroad. A few things had to give in the May 2010 Government budget. One was the consumption tax that is Goods and Services Tax (“GST”) being raised to 15% with effect from 1 October 2011, another was building fit-out items being deemed to be fixtures and classified as part of the “building structure” eg. tiles and vinyl flooring is now depreciated at the building structure depreciation rate, and the building structure depreciation rate has been reduced to 0% (from 3% diminishing value, 2% straight line) with effect from 1 April 2011. At that time the Minister of Revenue the Honourable Peter Dunne and the Honourable Bill English as Minister of Finance suggested that there would be tax changes to LAQCs. We knew changes were coming – we had thought that LAQCs would be taxed as Limited Liability Partnerships and have to file IR7 returns, with LAQCs would be abolished to just be qualifying companies. Now far more light has been shed with LAQCs and QCs being able to continue, just without the ability to attribute losses to their shareholders! So from 1 April 2011 LAQCs will lose their major benefit – being able to reduce their taxable income. They called for submissions on this and wanted to work out the detail. My previous blog contains the Press Release.
My Interpretation
If you have an LAQC you will need to take an extremely serious look at your structure and indeed portfolio and look for options on what to do with it. The draft legislation will give full certainty, but one thing is for certain. If you have an LAQC and make tax losses from which you have been offsetting your personal income – you will not be able to do this post 1 April 2011. You will need to make changes, and before 31 March next year.
Follow the text of the draft legislation very carefully and look very carefully at your depreciation claims. As Steve Tucker the owner of NZ’s leading chattels appraisal company Valu-it said in his address to APIA in July 2010, that depreciation claims are likely to be slashed by 60 – 85% depending on the type and nature of the property. Older buildings with few valuable depreciable fit-out and chattels items would be amongst the hardest hit, as would commercial property as their is very little Landlord fitout or chattels.
Look at your latest set of financial accounts and analyse what is likely to happen to you post 1 April 2011. If you need to make changes I would strongly suggest that you talk to me and we can look together at all of the fantastic benefits that trusts can provide you with. Having worked at both leading chartered accountancy firm Deloitte, leading law firm Russell McVeagh, being a successful property investor myself, and having worked with property investors on ownership structures for a number of years, I can work with you to balance tax optimisation and asset protection objectives in this challenging political climate. Contact me at david@davidwhitburn.com or on direct dial (+64 9) 528 5533.
The Minister of Revenue, Peter Dunne yesterday announced that the NZ Government intends to repeal gift duty. This is on the basis that concerns around creditor protection and social assistance targeting can be addressed. Practically speaking this means that the typical family trust which has an own home in it, sometimes a bach and other personal or real property, will be asset protected a lot quicker. Soon it will be quite likely to not have to draft deeds of reduction of debt and prepare gift statements to forgive $27,000 per year (per Settlor) – instead the whole amount will be forgiven in one document.
This will save the average person a lot of money in accounting and legal fees, as unfortunately most Kiwis don’t get professional structure advice before they purchase their own homes, and then they build up significant equity in them and have a larger amount to gift (as the value of their house goes up over many years) and they can run low in time to gift the money. I would expect a 5 year stand-down or clawback period or perhaps something slightly shorter to protect creditors, and social welfare needs.
Here are the current gift duty rates in New Zealand:
From this table you can see why everyone targets $27,000 as that is the maximum “gift” allowed before gift duty is payable.
Here’s the statement from the Honorable Peter Dunne’s ministerial website:
Officials have been reviewing the gift duty rules for several months, and a strong case has emerged for repealing the rules altogether.
Gift duty was originally introduced to prevent people from circumventing the estate duty rules. When estate duty was abolished, with effect from 1992, gift duty was retained to prevent people from gifting away large assets, where doing so may undermine the interests of creditors, minimise income tax liability or enable access to social assistance.
The use of gifting programmes ensures that gift duty is not paid in most situations.
For example, assets are sold at market value, usually to a trust, in exchange for a debt which is progressively forgiven. This means that the vast majority of gift duty statements that Inland Revenue receives are not liable for duty.
The result is that very little revenue is being collected, but at a significant cost to Inland Revenue and to the private sector in compliance costs.
The alignment of the top personal tax rate with the trustee tax rate announced in Budget 2010 will significantly reduce the motivation to minimise tax obligations through gifting to trusts.
However, there are still some valid concerns around preventing gifting which may undermine the interests of creditors or which enables access to social assistance.
Officials have been talking to relevant government departments about these issues and possible new protection measures.
There will be further consultations over the next few months, and if gift duty is to be repealed, I intend to include it in a tax bill to be introduced in November this year,” Mr Dunne said.
Mr Dunne said that as leader of UnitedFuture he was especially pleased that gift duty looks likely to be abolished, as removing gift duty has long been UnitedFuture policy, he said.
This is a policy of UnitedFuture that I really like. Subject to a reasonable (say 3 – 5 year) stand-down or clawback period to ensure creditors needs are not able to be compromised and social welfare/aged care benefits aren’t too easy to qualify for, then I am a huge fan of this proposal. I look forward to updating you when this is put into a tax bill in November.
We are in a very interesting phase of the property cycle at present. There is no mistaking the fact that we are still in the downturn phase of this current property cycle. New Zealand business confidence has not returned, there is an international environment of some fear with Greece, Spain, Portugal, the State of California in the USA, all having serious credit default issues. Employment figures and the amount of mortgagee and indeed fire sales are hardly rosy news for the property market right now. What’s worse is that there is a lot of fear in the market particularly amongst property investors with interest rates forecast to rocket up and uncertainty over tax changes.
As a result there is little wonder that house prices are slightly reducing, and the number of days to sell a property has been increasing in many areas across the country. Uncertainty creates fear, and the manifestation of this emotion is to make excuses to defer a property based decision (such as buying or developing an investment property). I think that we are in a W shaped recovery, and we are heading down towards the second V (of the W). Fortunately this V is less unpleasant than 2008′s deep V, that we recovered from in 2009.
Revenue Minister Peter Dunne’s Comments Today
There is currently a lot of conjecture about just what the Government will do on 20 May 2010 in the budget. Peter Dunne has suggested to a meeting of the Internal Fiscal Association at Christchurch (as reported in the NZ Herald), that:
This is not an attack on landlords, as some have protested, but a rebalancing act designed to address the concerns highlighted by both the Tax Working Group and the Governor of the Reserve Bank over the years about distortions favouring property investment over other forms of investment
There are also likely to be lower personal taxes across the board – not just for the top end of the income scale as some allege – to encourage productivity, investment and saving.
The proposal that GST be lifted to 15 per cent, would only go ahead if appropriate compensation was provided for those who need it, while no exemptions for specific items would be introduced.”
Anti-property commentators like Bernard Hickey will be very happy to hear of these tax changes, but still will no doubt be disappointed that the changes didn’t go far enough! That said we all need to wait and see what the budget holds for us. I agree that there needs to be a balance, but the reason for the perception of property investment being the best asset class in New Zealand is only a comparative one. There is significant under performance in our shares and managed funds. Some of this is indeed not helped by Government policy. If we had a company tax rate lower than that of Australia and other countries in the world would we have had so many of our companies delist from the NZX. Being a smaller country means that we cannot really afford to lose Nufarm, Fletcher Forests, Fletcher Paper, Fletcher Energy, Lion Nathan, companies have reduced the available pool of investment.
The simple fact is that the Australian Share Market is a much better performer than the New Zealand Share Market with better opportunities in for diversification, and in general growth. Additionally the Australian Property Markets have also risen faster than those in New Zealand – that is capital growth rates are slightly higher than in New Zealand.
So why are so many bashing property?
Sadly it is all too common in New Zealand that if someone or something does well we try to knock it down a peg or two, to become “normal”. The most unfortunate thing is that we should all be trying to bolster the lame ducks that are the share and managed fund industries in NZ. Lets encourage and foster growth in shares and managed funds, rather than trying to slam property investors.
An example of the misinformation is that property investors make a net tax loss. This is total fallacy. Information sourced by the New Zealand Property Investors Federation from NZ Inland Revenue proved that in only two of the past 28 years did property investment make a net tax loss. Yet the Tax Working Group and NZ Government still think property investors cost the country money.
Opportunities available
Whenever there is fear, there are also opportunities. There are an enormous number of investors hurting and some banks are stockpiling mortgagee sales, as if they released them all the market would come tumbling down, along with their security values! With less investors looking to buy, rents are likely to go up. With some pessimistic investors thinking that losses will be ring fenced (disallowed), and some business owners and people in general really feeling the pinch, some amazing deals have happened. I know of an investor in West Auckland getting a property with council valuation at $625,000 (the registered valuation would be around $600 – 620K), for just $440,000. Vendor finance, and options to purchase property in the future are becoming more popular options.
As a result I would encourage you not to be scared of the May 20th budget. If you have a safety buffer and can get a pre-approval, consider buying an investment property now. Get the best cashflow you can get, but buy well below value (aim for at least 20% of the value) and that way you will be buying a safe investment.
I remember what happened after September 11, in 2001, where the market stopped for a fair few days. Some homeowners freaked and firesold their properties. Those buying the properties had snapped up absolute bargains and also benefitted from the biggest boom in NZ history from early 2003 to mid-late 2007.
So gather all the information that you can, make the smart decisions and carpe diem.