IRD defies Parliament in family-trust tax grab

By Brian Fallow

WELLINGTON - Inland Revenue is disregarding the will of Parliament in a bid to grab tax from family trusts.

Earlier this year, Parliament enacted a tax bill making it clear that family trusts whose potential beneficiaries include charities can still escape tax on debt forgiven.

But the IRD, in a draft public ruling issued last week, continues to regard as fair game debt forgiveness benefiting trusts set up before May 20, 1999, which is when the new legislation took effect. Peter Dunne, who chairs Parliament's finance and expenditure committee, is critical of the department's attitude.

"By passing the legislation, Parliament stated what it thought the law should be, which seems to me to send a pretty clear signal to the IRD and others about the nature of any draft interpretations."

Bill Patterson, a tax partner at law firm Rudd Watts and Stone, said that despite deficiencies in the drafting of the rules, they had worked well enough in practice for nearly 10 years. It was widely understood that debt forgiveness programmes of family trusts were exempt.

But in 1996, IRD issued a draft ruling, applying to debts forgiven in the 1996, 1997 and 1998 income years, which took a narrow view of the scope of the exception.

Its latest ruling, representing the department's view of the law up to May 20 this year, says all the potential beneficiaries must be relatives or close friends of the creditor.

Mr Dunne said the law had been amended to give effect to what the MPs had thought had been the position.

He did not recall any specific discussion within the select committee about when the change should apply.

Mr Patterson said it was standard practice to include charities in the class of discretionary family trust beneficiaries, and also family companies, and superannuation schemes of which a beneficiary was a member.

To regard such family trusts as tainted for tax purposes would bring within the tax net many family trusts set up for estate planning purposes.