IRD - master or servant?

By Brian Fallow

Between the lines

Inland Revenue's arrogance towards Parliament is starkly on display with the release of its draft ruling on debt forgiveness and family trusts.

Only this year, Parliament enacted the Taxation (Accrual Rules and other Remedial Matters) Act to clarify a vexed issue which the IRD had created over family trusts.

Yet the IRD won't give up. It seems determined in a new draft ruling to have the last say on the matter.

It is persevering with its old interpretation on transactions made before the act came into effect on May 20.

The potential tax bill for past debt forgiveness may be huge, given the large number of trusts caught in the trap.

The mechanism causing friction between the IRD on one side and Parliament and family trusts on the other is simple.

For years, a common way to fund a family trust has been to lend it money and then to forgive part of the debt each year as a way of avoiding death and gift duties.

The maximum debt forgiveness was $27,000 a year. Any sum above was subject to gift tax.

Moreover, it has long been common for family trust deeds to define the potential beneficiaries in wide terms, going beyond relatives and family to include charities.

Even though the mechanism came into effect with a law change way back in 1987, the IRD suddenly objected to it in 1996. It said in a draft ruling then that charities failed a test of the original legislation that required the giver to have "natural love and affection" for the recipient.

MPs on Parliament's finance and expenditure select committee say they intended their work on this year's act to clarify the law, not to change it.

The new legislation restored the status quo by spelling out how the law was meant to include charities as legitimate beneficiaries.

But although they were well intentioned, they were also partly to blame for the continuing muddle. They should simply have backdated this provision to cover past transactions.

The IRD, however, seems to have a different view of the new legislation. It seems to believe that Parliament was changing the law.

Thus, with its latest draft ruling the IRD feels free to continue to apply its own interpretation of the old rule up to May 20.

So far, the IRD has produced only a draft policy on the issue. It may yet be forced to relent. Alternatively, it may be overruled by the courts.

What is troubling, however, is that the IRD should even think of disregarding the will of Parliament, freshly expressed, on a question like this.

It seems to think it has a higher duty - to preserve the tax base against allcomers.