Forgiveness of debt held to be a “monetary” gift

Summary

Nancy Lois Roberts (“Mrs Roberts”) challenged a decision of the Commissioner of Inland Revenue (“the Commissioner”) disallowing charitable tax credits for gifts she made to the Oasis Charitable Trust (“the Trust”). At issue was the meaning of “a monetary gift of $5 or more that is paid…” under s LD 3(1)(a) of the Income Tax Act 2007 (“the Act”) and whether Mrs Roberts’ forgiveness of debt of the Trust constituted “a monetary gift”. The Commissioner argued that forgiveness of a debt is not a charitable gift within the meaning of ss LD 1 and LD 3 of the Act, because “monetary” means the payment must be made in cash form only.

The Court found in favour of Mrs Roberts.

Impact

The judgment clarifies that forgiveness of a debt owed by a qualifying entity can constitute a “monetary gift … paid” to such a trust.

The judgment further determines that in appropriate circumstances, taxpayers forgiving debt owed to them by charitable trusts can claim tax credits for such forgiveness.

Facts

Mrs Roberts and her husband jointly established the Trust on 14 October 2007 and registered it with the Charities Commission in November 2007. The Trust’s charitable objects were to facilitate the growth of Christian faith within New Zealand by helping local churches, providing assistance to people in need of shelter, clothing and education, and by raising money for the benefit of the community.

On 16 October 2008, Mr and Mrs Roberts loaned $1,708,080.90 to the Trust in the form of a bank term deposit, with $500,000 to be invested in Telecom bonds and the remainder on a term deposit with interest to be reinvested in the name of the Trust.

In each income year ending 2011 to 2015, Mr and Mrs Roberts executed Deeds of Gift which released the Trust from liability to repay specified amounts of the loan. They then claimed a tax credit for each of those five years on the basis that the forgiveness of debt was a charitable gift. Those credits totalled $91,577.24, corresponding to $274,732 of forgiven debt.

The Commissioner wrote to Mrs Roberts on 1 December 2015 initiating a risk review with respect to her claimed tax credits. On 4 May 2016, as a result of the review, the tax credits were reversed and Mrs Roberts was requested to repay them.

Decision

Interpreting the meaning of “monetary”, the Court first looked at the legislative history of ss LD 1 and LD 3. The predecessor of these sections in the Income Tax Act 2004 was s KC 5 which allowed rebates for gifts of “money of $5 or more…” The Court found that Parliament intentionally removed the word “money” when enacting ss LD 1 and LD 3 of the (2007) Act. The Court saw significance in the fact that Parliament later redressed questions raised about this removal by qualifying the gift with the phrase “monetary” on 27 February 2014 (Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014, ss 2 and 103), rather than restoring the previous wording of “money”. The Court said because Parliament chose to sue a broader phrase,, this suggested a broader scope to the provision. If Parliament sought to restrict tax credits to cases of cash donations only, it could have clearly amended the section to reflect that.

The Commissioner argued that potential mischief may arise from a finding that forgiveness of a debt can be charitable gift, including the fact that it could be difficult to verify the details of loans made many years prior, it would provide the opportunity for taxpayers to manipulate books of account to reflect loans that have in substance not been made, and valuation issues could arise in cases where a charitable trust becomes insolvent and the loan has been reduced to a lower sum than its face value.

The Court found that forgiveness of debt does not raise the same issues of valuation that arise for donations of chattels or property, which are outside the scope of s LD 3 (Roberts v Commissioner of Inland Revenue [2018] NZHC 2153). It held that forgiving a debt places a charity in a better position than before, as well as in the same position as if a taxpayer had made a cash donation. Finally, the Court found that the administrative costs incurred by the Commissioner would be the same whether the donation was made in cash or in the form of forgiveness of debt, making the prospect of mischief minimal.

The Court held that “monetary” is a broader concept than “money” in the form of cash and did not accept that “monetary gifts” must be cash only. The value of the gift is the monetary figure that is credited to the recipient.

The Court found that Mrs Robert’s gifting programme, by which, each year the Trust’s debt was forgiven in portion, by Deeds of Gift, resulted in the Trust’s liability being reduced each year. The Trust was the recipient of a gift in the express amount of the relevant Deed of Gift, and such sums qualify as gifts.

The Court held that to require monetary gifts to be made in cash only, as the Commissioner submitted, artificially restricts the legislative language of the Act (at [57]).

Regarding the meaning of “paid” in s LD 3 of the Act, the Court noted case law authorities consistently recognise that payment can be effected by the reduction of a debt (see Databank Systems Ltd v Commissioner of Inland Revenue [1990] 3 NZLR 385 (PC); In re Harmony and Montague Tin and Copper Mining Co (Spargo’s Case) (1873) LR 8 Ch App 407 (EWCA); North Sydney Investment and Tramway Co Ltd v Higgins [1899] AC 263 (PC); and Healing Industries Ltd v Commissioner of Inland Revenue (1988) 10 NZTC 5,115 (HC)), thus Mrs Roberts’ monetary gifts were “paid” to the Trust within the meaning of the Act.

The Court found that Mrs Roberts’ forgiveness of the Trust’s debts were monetary gifts of $5 or more paid to a charitable trust within the scope of s LD 3 of the Act, and therefore Mrs Roberts was entitled to claim tax credits for the years ending 2011 to 2015.