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14 July 2022

Over my dead body

Will we ever see a Wealth tax or Death Duties again in NZ? Here’s a case for keeping the family trust intact


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Introduced in New Zealand way back in 1866, death duties were a staple income for the government until their abolishment in 1993. When we had death duties, an exemption was provided for the family home, along with the first $450,000 of wealth an individual held. Beyond that, every dollar of wealth was taxed at 40%, payable in cash on death.

Think about that for a minute – 40%, payable in cash. Can you imagine the pain and carnage that created? We also had land tax, where tax was levied annually at 2% on the government valuation of investment land, regardless of the land’s income.

Although death duties are long gone, the legislation has not been repealed. The rate of tax was simply moved from 40% to zero.

I can clearly remember back thirty long years ago, when I was a junior clerk, watching the panic in my bosses’ eyes when a client had to face the reality of a terminal diagnosis and the family had to find the death duty money in grief.

In those days, everyone had a family trust. Gifting your wealth gradually into the trust at $27,000 per year, which was the duty-free gift threshold, was the only way to protect family wealth from death duties.

The current generation of wealthy landowners has, for the most part, grown rich through their own endeavours, or via inheritance, without a memory of death duties – or fear of them. Most are now complacent about asset protection and struggle to see a reason to have a trust.

One of my senior clients recently recounted this story to me…

When his father passed away, and the IRD inspectors arrived and demanded to see through the family home – and his launch – to inventory his father’s assets, they assessed death duties on assets as small as his father’s Steiner binoculars that were kept on the boat! His comment to me was, “over my dead body, would I ever wind up my trust.”

Recently, the Trustees Act was amended to require some additional disclosure obligations to beneficiaries. Some trustees in their wisdom have decided that enough is enough and taken this as the reason to disestablish their trusts and have distributed wealth back into their own hands – wealth that they will now likely die with.

We live in a fine country that still has no stamp duties and no capital gains taxes, but now, thanks to Covid, has a huge deficit and a generation of young workers who can’t save the deposit for a house, who pay the majority of the income tax through PAYE on their wages.

We also live in a country with an MMP electoral system that typically requires parties to cobble together coalitions with minor parties to form governments. Policy concessions are often made to win power.

I recall immediately before the last election, and the Green Party came out with a policy that included implementing a wealth tax. The implication for Labour was that this may have been the price of power, should Labour have needed the Greens to govern. As it was, they did not, and the issue fell away. However, we were all given a sneak peek at how easily a policy like this can be reintroduced.

Recently, the Labour government has tasked the IRD to use new powers granted dubiously under urgency to begin a survey of 400 wealthy individuals whose assets exceed $20 million to look at the relationship between the wealth they hold and the amount of tax they actually pay. They are easy targets.

Given this government chooses not to enforce the existing tax laws that require profits from speculation in the share market to be taxed as income, and also given the focus of any audit would almost entirely be on the property sector, where income yields are now ridiculously low relative to property values, it’s going to come as no surprise to anyone that the result of this enquiry will inevitably find that the percentage of tax paid on income is very low relative to high wealth individuals actual net asset position.

Now, the question is, having made this discovery, what will this government choose to do with the information?

Would it be a great surprise to see them look to introduce a wealth tax or a death duty?

New Zealand is a highly desirable place to retire to, and, for the most part, income tax generated from wealthy people who chose to move here is not significant. Imagine, however, the windfall for the government if the entire global personal wealth of these retirees was subject to a death duty?

How will all those people who thought it was good to dismantle their trusts feel if wealth taxes or death duties were reintroduced that targeted the wealth they hold personally?

Could altering the law to make it that little bit harder to administer a trust have had something to do with wealth tax thinking?

How confident are we of what the political climate and attitude to death duties and wealth taxes will be on our date of death?

If a government can introduce a tax law that strips interest deductibility on income-earning assets from one particular sector, simply because it does not like the fact that the assets have become too valuable, is it such a big step to look to assess tax on that wealth or tax it on death?

Given what we have seen of late, I won’t be ruling it out for one.

Think long and hard before you strip away the protections a trust affords to your wealth because one day, you too will die, where your trust migh

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