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The Future Of Death And Taxes

Mark Withers poses the question if we will see wealth tax and death duties return to our shores.

By: Mark Withers

1 January 2022

Way back in 1866 New Zealand introduced death duties. When we had death duties an exemption was provided for the family home and the first $450,000 of wealth the individual held. Beyond that, every dollar of wealth was taxed at 40% payable in cash on death.

Forty percent, payable in cash. Can you imagine the pain that created?

We also had land tax, where tax was levied annually at 2% on the government valuation of investment land regardless of the income the land produced.

Death duties were abolished in NZ in 1992. But the legislation has not actually been repealed. The rate of tax was simply moved from 40% to zero. Thirty long years ago when I was a junior clerk I watched the panic in my bosses’ eyes when a client had a terminal diagnosis and the family had to find the death duty money in grief. In the days when we had death duties, everyone had a trust. Gifting your wealth gradually into a trust at $27,000 per year, which was the gift duty-free threshold, was the only way to protect family wealth from death duties.

IRD Nightmare

Most people started young to ensure they did not run out of runway and the issue was front of mind for accountants and lawyers. The current generation of wealthy land owners have for the most part grown wealthy through their own endeavours or via inheritance without a memory of death duties. Most are complacent about asset protection and struggle to see a reason to have a trust.

One of my senior clients recently recounted a story to me. He remembered when his father passed away and the IRD inspectors arrived and demanded to see through the family home and launch to make an inventory of 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: “Over my dead body would I ever wind up my trust.”

Recently the Trustees Act was amended to require 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 country that has no stamp duties, no capital gains taxes, but now a very large deficit due to Covid and a generation of young workers who can’t save the deposit on a house.

Easy Targets

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

I recall prior to the last election the Green Party coming out with a policy that included the implementation of a wealth tax. The implication was that this may have been the price of power if Labour had needed the Greens to govern. As it happened they did not and the issue fell away, but we were all given a sneak peek at how easily this could be reintroduced.

Recently, the Labour Government tasked the IRD to use new powers granted under urgency to survey 400 wealthy individuals whose assets are said to exceed $20 million. They will look at the relationship between the wealth they hold and the tax they actually pay. They are easy targets.

Given the Government chooses not to enforce the existing tax laws that require profits from speculation in the share market to be taxed as income, and given the audit is almost entirely on the property sector where yields are ridiculously low relative to property values, this enquiry will inevitably find the percentage of tax paid on income is very low relative to these 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 desirable place to retire and income tax generated from wealthy people who chose to move to NZ is not significant, but imagine the windfall if their global personal wealth was subject to a death duty here. How will the people that dismantled their trusts feel if wealth taxes or death duties were reintroduced that target the wealth they hold personally? 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 sector because it does not like how valuable the assets have become, is it such a big step to look to assess tax on that wealth or tax it on death? Think hard before you strip away the protections a trust affords your wealth. One day you will die, but your trust might have lived on.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz

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