Will we ever see a Wealth Tax or Death Duties again in New Zealand?

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.

Think about that for a minute. Forty percent, 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 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 But the legislation has not actually been repealed.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 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 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.

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. Or a 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 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 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 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, 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 who in fact pay the majority of the income tax through PAYE on their wages.

We also live in a country that has 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 prior to the last election the Green party coming out with a policy that included the implementation of a Wealth Tax. The implication for Labour was that this may have been the price of power if Labour had needed the Greens to govern. As it was, they did not and the issue fell way but we were all given a sneak peek at just how easily a policy like this can be reintroduced.

Recently, the Labour government has tasked the IRD to use new powers granted in dubious fashion under urgency to begin a survey of 400 wealthy individuals whose assets are said to exceed $20 Million dollars to look at the relationship between the wealth they hold and the amount of 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 focus of audit is almost entirely 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 inquiry 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 to NZ are not significant, but imagine the windfall if their entire global personal wealth was subject to a death duty in NZ.

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

Could it be that altering the law to make it that little bit harder to administer a trust might 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 then to look to assess tax on that wealth or tax it on death?

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

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 might have lived on.