KEY POINTS:
The $100,000 donation by expatriate billionaire Owen Glenn towards Winston Peters' legal expenses is under heavy scrutiny. Two of the many unanswered questions are: what are the tax implications for Mr Peters regarding receipt of such a large sum? And has he complied with the resulting tax liability?
As most people would expect, Inland Revenue Department would take great interest in the undeclared receipt of $100,000.
First, there is the question of whether the money constitutes income to Mr Peters under the Income Tax Act. Normally gifts are not considered to be income. Generally "income" is something that is earned, either from personal services or as a return on investments. However, in some instances it extends to include "gifts" given for extra services or additional benefits beyond expectation. Accordingly, if Mr Glenn gave Mr Peters the money as a mark of satisfaction with his past services as an MP or in the expectation of some future benefit to be bestowed, then the money would constitute income. That there was no binding contract or legal duty on Mr Glenn to donate the money is irrelevant.
Second, it is no excuse for Mr Peters to claim that he or his lawyer did not consider the payment was income. As all taxpayers will know, ignorance of the law is no excuse.
Many well-heeled taxpayers have been hit with a tax liability their lawyer assured them would not apply. Likewise, it is irrelevant that the money was paid to Mr Peters' lawyer and not to him personally.
The Income Tax Act is very clear that, as it was Mr Peters' legal bill that was being paid, it would be his income.
If the money was used to pay Mr Peters' debt, then it benefited him and it was therefore his income.
While Mr Peters and his lawyer have thus far declined to make the records public, bank and lawyers' trust account records showing receipt of the payment are not protected by legal privilege. The Tax Administration Act expressly states IRD can have access to all financial records. There is no "privilege" in payments, only in legal advice.
Even if the money is accepted at face value as a genuine gift from Mr Glenn, the Estate and Gift Duties Act clearly applies to such gifts. That act imposes gift duty on any money or property given to any person.
The major exception is donations made to registered charities - but in New Zealand political parties cannot be charities. The rates of gift duty are set out in the act, increasing from 5 per cent up to 25 per cent with the size of the gift. A gift of $100,000 would attract gift duty of $12,850.
When a gift is made, the act requires the person making the gift to file a gift statement detailing the amount and to pay the duty within three months. If the giver does not do so, the liability automatically passes to the recipient who must then file the statement and pay the gift duty.
The failure to do so constitutes a criminal offence under the Tax Administration Act.
The act also imposes interest and penalties on any gift duty not properly paid on time. So the initial liability in 2006 would have more than doubled by now.
Only Mr Glenn and Mr Peters know how they have treated the $100,000 for tax purposes and whether they have declared the gift and paid gift duty upon it. However, whatever the political consequences of the gift, Mr Peters is likely to face difficult questions from IRD.
* Mark Keating is a senior lecturer in tax law at (ironically) the Owen G. Glenn Business School of the University of Auckland.
