Tax change for marriage assets

Press, 7 April 1984, Page 18

Tax change for marriage assets

RUTH RICHARDSON, M.P. for Selwyn, explains a “tax revolution” for married couples.

The 1983 Budget devised the best material incentive yet for people to get and stay married. With that Budget came the recognition that marriage is a partnership of equals, and that any arrangement to achieve an equal stake in the assets of the spouses should not attract estate, gift, or stamp duty. The impact of this tax revolution has yet to be widely appreciated. It is important as the new duty rates become operative this week that married people understand and capitalise on the new tax regime. Last year was truly a taxpayer’s year (as opposed to a taxman’s year) for those who have assets of a human (i.e. a legal spouse) and material kind. The offer made by the taxman to forgo revenue is an offer that married couples should not refuse.

The origin of this tax revolution lies in the philosophy of the Matrimonial Property Act, 1976 that marriage is a partnership of equals. As each spouse is regarded as making an equal contribution to the marriage, it follows that each spouse has an entitlement to the assets of the marriage.

Under the Act that entitlement is merely a potential one — a potential that is generally only realised on the breakdown of a marriage. This lopsided state of affairs led many people, myself included, to campaign against the anomaly of legislation that allowed spouses at war to achieve an equal stake in their matrimonial assets free from duty, yet spouses at peace were required to pay a high price in estate and stamp duty to achieve the same object. I criticised this anomaly in my maiden speech to the House in 1982, and argued the case for reform thus: “Farming is generally a family effort and those of us responsible for policy formation should be sensitive to the part that the family plays in the agricultural

scene. It is my assessment that our revenue laws and practices have for too long given scant recognition to family involvement, not just in farming," but in all enterprises. “In particular, it is quite scandalous that we should allow the partners on the breakdown of a marriage to share in the assets free of duty, yet clobber a happily married couple with gift and stamp duty if they seek to achieve the same result. I will work for the recognition by our revenue law that all transactions between family partners should be free from such duties.”

I had only to wait until the presentation of the Budget the following year for the merits of that case to be accepted and for the substantial tax revolution to occur.

Features of the taxation reform are:

1. Spouses have the opportunity to split their assets evenly without duty being levied. 2. A splitting of assets will also create the opportunity to split income and so reduce the level of income tax payable. 3. Splitting of assets may occur in two ways:—

(a) Court Orders: (i) A Court Order when a marriage breaks down; (ii) A Court Order transferring property between partners in a continuing marriage (known as a Section 25 Order); (iii) A Court Order transferring property after the death of one partner (under the Matrimonial Property Act, 1963). (b) Matrimonial Property Agreements (known as a Section 21 agreement): Marriage partners are free to deal with all or any of their assets, class them as matrimonial property, and make an agreement splitting ownership evenly, free from any duties. The key requirements of a Section 21 agreement are these: (i) the agreement must be in writing; (ii) each party must have independent

legal advice before signing: (hi) signatures of the parties must be witnessed by a solicitor who must certify that the parties understand the implications of their agreement.

The worth of the reform can best be illustrated by taking a typical farming example — typical in the sense that the couple are paper rich and income poor!

The husband’s assets are: Farm, $600,000; shares, $20,000; bank account, $lO,OOO. The wife's assets are: Bank account, $15,000.

The Section 21 agreement between the spouses declares the farm and shares to be matrimonial property to be held in equal proportions, with the respective bank accounts to remain separate property — that is, property not liable to be shared.

After the agreement the husband retains his bank account ($10,000) as separate property, he continues to have half the farm ($300,000) and half the shares ($10,000) as matrimonial property.

The wife retains her bank account ($15,000) as separate property. She also has half the farm ($300,000) and half the shares ($10,000) as matrimonial property. The gift duty position is that, pre-Budget, a gift to the wife of $310,000 would have incurred on the new April, 1984 scales, duty to the tune of $42,850. Post-Budget, no gift duty is payable. The estate duty position is:

Pre-Budget: If a couple had left things as they were, $450,000 of the estate would be free from estate duty; that would have left $lBO,OOO worth of assets subject to duty at 40 per cent which totals $72,000 worth of estate duty payable. Post-Budget: The couple will each be able to transmit $450,000 to the next generation free from duty. In other words, spouses will now be able to access themselves to a combined estate duty exemption of $900,000.

Put another way, the legislation gives spouses an escape route from the $lBO,OOO worth of estate duty that would have been imposed on

that second lot of $450,000 worth of assets.

For most couples with assets, a $900,000 estate duty exemption will mean a virtual abolition of estate duty. I have always contended that estate duty is a thoroughly disreputable tax, as unmanageable as

death. The 1983 Budget for most couples removes that scourge. I cannot think of a more worthwhile reform, particularly for the farming community. It now falls on the shoulders of married partners and their professional advisers to ensure that steps are taken to reap the benefit of this reform. Beware those who do nothing. No matrimonial property agreement — no relief. I advise every marriage partnership interested in avoiding estate duties to have drawn up, without delay, a matrimonial property agreement. Marriage partners may experience some resistance from their professional advisers, whether they be lawyers or accountants. That resistance will largely be the result of ignorance. There is a failure in some professional quarters to appreciate that a tax revolution has occurred and that the social policy behind the reform means that

Inland Revenue will now willingly (and indeed legally) forgo tax and duty. Accountants are to be congratulated for the steps they have taken to overcome the information gap Last week the New Zealand Society of Accountants concluded a continuing education series entitled. "A Review of the Matrimonial Property Act and Estate and Planning Implications." That seminar series was conducted in 17 centres over a six-week period. The two seminar contributors wondered out loud why no proper publicity had been given to the reforms — hence this article. We must extend the matrimonial property regime and its tax advantages to those marriages that have stood the test of time and terminate only on the death of one partner. It is a travesty that those who die without making a matrimonial property agreement will generally incur estate duty when, by their will, they simply seek to achieve the same result as could have occurred had they made a matrimonial property agreement while thev were both alive.

Surviving spousees in these "do nothing” circumstances - and I lament the fact there will be many of them — are left either to try to bring themselves under the Matrimonial Property Act, 1963. or to face the devastation of estate duties. That is not justice and so the next crusade is launched to extend the principles of the Matrimonial Property Act to the death situation.

This article has concentrated on a reform of obvious benefit to couples with assets. Many couples, however, do not earn their living from assets, but from their earnings as employees. For those families on wages or salary, an obvious logical extension of the Budget’s reforms involves looking at the opportunity for income splitting. The worth of income splitting was explored by the McCaw Committee on Tax Reform and I am sure we have not heard the last of this issue.