This article was published on 27 August 2005. Some information may be out of date.


  • Grandparents don’t need a trust to save for their grandchildren.
  • New Zealand’s tax on capital gains is confusing.
  • Depreciation on rental property.

QWe (a law firm) read with interest the August 6 letter regarding investing small sums to build a small nest egg from one of your readers — referred to below as “the donor”.

(The letter was from grandparents secretly saving $30 a month for each grandchild to give the child at age 18.)

However, in our view the plan has a number of flaws that could defeat the donor’s objective. For example:

  • As the investments are in the donor’s name, there is a risk of the donor dying prior to gifting the investment.
  • There is a risk that the planned gifts could be dutiable (say the intended gifts of approximately $10,000 to $12,000 are made to three grandchildren in the same year).
  • There is the potential for half of each gift to end up in the hands of the grandchildren’s future partners.

Each of these flaws could be addressed if the donor settled a trust for each grandchild and gifted the money to each trust.

Although the eventual gifts would likely be reduced by the costs associated with settling the trusts, they would have the potential to set each of these children up for life, and beyond.

Advantages include:

  • Eliminating the risk of the investments forming part of the donor’s estate should he or she die prior to the culmination of the plan.
  • Presuming the annual gift threshold of $27,000 per donor is not exceeded (due to other gifts), the risk of gift duty being assessed is eliminated.
  • If the trustees of each grandchild’s trust utilise the funds in due course to contribute to an asset purchase, in the event of a subsequent relationship break-up, this asset is unlikely to be included in the pool of relationship property available for division between the former partners.

Although we note that the trustee would be taxed at a higher rate than the lowest marginal tax rate, it would also be possible for each trust’s income to be taxed at the beneficiary’s marginal rates.

However, in the event that this was done, the funds would have to be appropriated to (and eventually paid to) the beneficiary rather than accrued in the trust.

We hope that these comments are helpful.

AWhile I really appreciate your writing, this seems to be an excellent example of what I call trust overkill — setting up trusts that make life more complicated and expensive, for little if any gain.

Trust expert Bill Patterson of Patterson Hopkins more or less agrees with me. “The amounts of money are too small to justify a trust,” he says.

The possible problems you list are either solvable in other ways or not relevant. And trusts would reduce flexibility. If the grandparents come upon hard times financially, “or the kids turn out to be rotters,” with trusts set up the grandparents couldn’t change their minds, says Patterson.

You’re right, of course, that the grandparents might die before the grandkids all turn 18. But, says Patterson, “I would cover the problem by a gift in their wills. If there are separate term deposits they could be individually identified in the wills.”

On the matter of gift duty, he says, “the issue is too far off to worry about. Who knows what the rules might be then.”

Furthermore, says Patterson, if the gifts are used for education, which seems likely, there’s a special exemption from gift duty for money given for a relative’s education.

I would add that we’d have to struggle to find a scenario in which the current gift duty — which kicks in when a couple gives away more than $54,000 — would apply.

Each grandchild is expected to get no more than about $13,000. That means more than four grandkids would need to turn 18 in one year, with none of them using the money for education.

Even if one of the grandparents had died, we would still need more than two turning 18 and not continuing their schooling.

What’s more, the grandparents could see the problem coming and plan for it, perhaps by giving some of the money away a year earlier, in exchange for a promise that it not be spent for a year.

You mention other gifts, but the couple could simply refrain from making other gifts in a particular year.

As for the chance of ex-spouses getting their little mitts on the money, that seems remote. If the grandkids get the money at 18, they are highly likely to spend it before they even get into a marriage or de facto relationship, let alone get out of it again.

Patterson adds, however, that your letter is “a valid reminder about the Property Relationships Act, and relevant to those who wish to leave significant sums to family members.

“At this point a trust really has advantages, and it is here that the points made at the end of the lawyer’s letter make sense.”

Speaking of those points, about tax rates, it all sounds horribly complex. And, as you yourselves point out, the grandkids’ gifts would be reduced by the costs of setting up and running the trusts.

The benefits to the grandchildren, “for life, and beyond”, just don’t seem to be there — unless you know something I don’t know about the afterlife!

QA recent correspondent asked if he should include on his tax form occasional capital gains he has luckily made.

The deplorable state of affairs here is that there appears to be no definitive or authoritative answer. Why not? Has no one ever asked the IRD?

The picture you paint of IRD civil servants waiting to pounce on not only those of criminal intent but also the unwise and unwary I find unreasonable and therefore unacceptable.

Please, please can we get a ruling rather than a stream of opinion.

AI agree, the uncertainty about tax on capital gains is deplorable.

It’s not for the want of asking Inland Revenue. I and others ask about different situations all the time.

But we can’t blame the department. The fault, dear Brutus, is not in the IRD but in the law — a law that depends on people’s intentions when they go into investments. That’s weird.

The only answer is to lobby MPs for a change in the law. It’s not too late to make this an election issue. Get out there and ask the tricky questions!

QI would like to add a few comments to the discussion about depreciation of rental properties from my experience as a barrister practising in tax.

I agree that the claiming of the “extra” depreciation deductions is risky. But there is a solution to avoiding nasty IRD penalties.

First you file a tax return or self assessment, but do not claim a deduction for the “extra” depreciation. Within two months (a strict time limit) you file a Notice of Proposed Adjustment (NOPA), which asks IRD to change the tax return to include the “extra” depreciation deductions.

The IRD then has four months to officially respond by a Notice of Response (NOR). There are then further procedures the taxpayer can take if dissatisfied with the response.

The benefits of this procedure are that the IRD must make a response in a short time frame, shortfall penalties are avoided and the right to a deduction is preserved until the issue is settled. The negative is that tax is payable on a higher income as the increased depreciation deductions are not yet claimed.

By the way these procedures are useful for any situation where any tax position causes concern.

Last week you passed on advice from the IRD that if a deduction was not claimed but IRD later decided such deductions would be allowed, and then the taxpayer asked for a reassessment, IRD would consider changing the assessment pursuant to their Standard Practice Statement INV 510.

Regrettably that advice was not entirely correct. That SPS 510 applies only to errors such as adding mistakes.

The SPS clearly states that there will be no amendment where the interpretation of legislation is at issue. In particular it claims that the dispute resolution procedures (NOPA, NOR etc.) take primacy.

The ability of the IRD to amend under the Tax Administration Act s 113 does not provide an alternative method of changing a tax position.

AThanks very much to another lawyer offering us the benefit of your wisdom. And your advice about NOPAs seems sound.

Inland Revenue confirms that taxpayers can file NOPAs in these circumstances. “The detailed requirements are set out in a recent Standard Practice Statement which is on Inland Revenue’s website,” says a spokesperson.

“However, whether or not the Commissioner accepts the proposed adjustment is considered on a case-by-case basis.”

The department disagrees, however, with your comments about SPS 510. “Although arithmetic and transpositional errors are common examples of errors where IRD may amend an assessment, they are not the only situations.

“If Inland Revenue reaches agreement on both the law and the facts it can make appropriate amended assessments,” says the spokesperson.

While the IRD acknowledges that assessments can’t be amended because of interpretation of legislation, “the circumstances of each case need to be considered.”

“We cannot pre-empt the outcome of any or all taxpayer requests in the hypothetical situation of IRD adopting an accelerated depreciation approach.”

So where are we? If I were a landlord I would claim the lower depreciation and look into both NOPAs and SPS 510 amendments.

It’s complicated stuff. Then again, landlords, if you’re honest about it you have to admit that the extra depreciation is gravy.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.