More on tax issues re the Glenn donation

I blogged on Tuesday some expert opinion on the tax issues around Owen Glenn’s donations. I discovered a surprisingly high number of lawyers read this blog and many of them contributed to the thread. Many suggested the gift duty was dependent on whether Owen Glenn was a NZ tax domicile.

Mark Keating, who was quoted in the Herald also, has sent me a response to the comments:

I quote sections of the Estate & Gift Duty Act 1968 to establish that, regardless of the residence of the donor, the money is still subject to gift duty.

First, the definition of “gift” in s 2 is:”any disposition of property, whereever and howsoever made”.

That is pretty wide you will agree!

Second, that general definition in s 2 is further expanded upon to include a whole range of transactions where 1 party gives / receives more than the other (ie, any bargain that is intended to be unequal is effectively treated as a gift – so I cannot sell my house to you for $10 and say “that is just our contract”.  If the bargain is unequal, then it will be considered a gift under the Act).  The list of those examples of what kind of transactions can be gifts is, not surprisingly, very long … but it specifically includes:

” the payment, release, discharge, surrender, forfeiture or abandonment of any debt”.

So beyond any doubt (as you would expect) the payment by Owen Glenn of $100k of Peters’ legal fees is a “gift”.

But the residence issue is dealt with elsewhere, in s 63(1).  It specifically says a gift is subject to gift duty if it is made by a person who is domiciled in NZ (category 1, which will not apply here) or (category 2):

“all property situated in NZ, comprised in any gift made by any donor to any donee, where the donor is domiciled OUT OF NZ at the date of the gift” (my emphasis).

So it DOES catch donations made by persons who are not domiciled in NZ, provided “the property is situated in NZ”.  In those cases, the residence of the donor is irrellevant.  The people who made comments have only identified category 1, and ignored category 2 gifts.

So you have to determine IF the property “is situated in NZ”.  That is determined by s 63(2), which lists when (and when not) property is “situated in NZ”.  Again, it includes a very long list of things that are caught and things that are not.  But within that list is included:

“(e) a debt owed by a person … is treated as property situated in NZ if any of the debtors are resident in NZ”.

So:
(1) the debt was WP’s personal legal bill, and
(2) WP is resident in NZ, then
= the debt is treated as property situated in NZ = so gift duty is payable upon that debt.

And I have to say, that is the LOGICAL result.  Would your commentators really expect that $100k given to pay a NZers debts in NZ is not subject to Gift Duty.  I mean,  come on (!) – IRD are a bit smarter than that!!!  To have this kind of donation excluded would be a MASSIVE loophole in the Act.

So you can confidently respond to those who have made comments that the residence of Glenn IS irrelevant.  The legal debt owed by WP (who is a NZ resident) is sufficient to mean the gift is subject to NZ Gift Duty.

I am not a tax lawyer of course but Mark’s comments seem very strong to me.