Income from Gifts of Capital

11.16. There are difficulties in the way of dealing with income-splitting in the area of gifts. Where one person becomes the legal owner of an asset as the result of a gift from another, that asset may be income producing, may be incapable of producing income, or may not have been producing income when given but is capable of producing income when put to another use. Subject to such exemption or reliefs as the gift duty legislation may allow, gift duty will be payable on the capital value of the asset. Its value may be reflected in the income it produces or is capable of producing. If the subject-matter of the gift is cash, its value for gift duty purposes will be the amount given. But a gift of cash may not have effected any split of the donor's income: it may have been paid out of a credit balance in the donor's bank account. On the other hand, the donor may have sold an income-producing asset (a parcel of shares) or an asset not producing income (his own residence) or one not capable of producing income (jewellery) in order to obtain the cash to give. Ordinarily, in the latter two cases, there would again be no split of the donor's income. These are some only of the aspects of a gift when looked at in the hands of the donor and before he parts with it to a donee.

11.17. The asset when transferred into the possession and ownership of the donee may in turn be given to a third party, sold for a price above or below its value, mortgaged, exchanged, consumed, rendered non-income yielding or made to yield an income greater or less than that obtained by the donor when it was his property. The form and character of the asset may be materially changed by the labor of the donee

  ― 147 ―
himself or by the expenditure of his own moneys. By that expenditure the donee may have effected a reduction of his own income. It is unnecessary to list further illustrations. Enough has been said to indicate that the form, character and value of the subject-matter of the gift in the ownership of the donee in a great many instances will be markedly different to the features it exhibited in the ownership of the donor. More importantly, there is no necessary correspondence between either the income-producing qualities of the asset or the income it in fact produces in the ownership of the donor and donee.

11.18. If the donor owns a valuable work of art from which he derives only his own personal enjoyment and makes it the subject of a gift, it would not be a practical course to impute an income to the donor or the donee for the purpose of exacting an income tax from the donee, as the pleasure obtained from its ownership will vary with the personality of the owner and the use to which he puts it. In the genuine case of a gift of non-income-producing assets there is no income splitting by the donor. If the donee converts such assets into income-producing investments or sells them and invests the proceeds so as to produce an income, in either case the net income proceeds will normally be taxed in the usual way by taking into account the deductions allowable in respect of the production of that income.

11.19. The outright gift of income-producing property which confers upon the donee as its absolute owner the unfettered right to do with it as he wishes presents problems which are difficult to resolve in a manner that is both practical and equitable. If the donor splits his income by giving to the donee an income-producing asset, its income proceeds, whilst the asset remains intact in the donee's hands in the form given to him, could be identified and taxed at a rate equal to the rate of tax that would have been payable by the donor had those proceeds been included in his assessable income. The same objective of income-splitting could be achieved if the donor were to realise an income-producing asset and give the cash proceeds, or a non-income-producing asset aquired with those proceeds, to the donee who thereupon invested the cash proceeds, or the proceeds of the realisation of the asset gifted, in an asset that produced income for him. Whatever course be pursued, the subject-matter of the gift—the asset in specie or the cash—will have borne its appropriate gift duty. Difficulties for income taxation are to be met with in each case. For example, the donee may realise the income-producing or the non-income-producing asset given to him in specie and out of the net proceeds now mixed with his own funds in his bank account may take another investment, or by his own exertions or expenditures the donee may alter the income characteristics of the asset he has retained. Similar problems can be envisaged where the gift takes the form of the cash proceeds.

11.20. In those circumstances the onus should, perhaps, rest on the donee to satisfy the Commissioner either that there is no income derived by him which is attributable to the subject-matter of the gift or that, of the income he does derive from an investment constituted in part by his own funds and in part either by the proceeds of the realisation of the asset originally given or the gift in the form of the cash proceeds, so much is attributable to the subject-matter of the gift to be taxed as if it were the income of the donor, and so much is attributable to his own labours or expenditures.

11.21. A statutory alternative would be to adopt as the income of the donee attributable to the gift an amount determined by applying a rate per cent, say a rate equal to the ruling bank overdraft rate, to the amount of the gift or to some part of it that could reasonably be regarded as producing income. This alternative would be available for adoption by the donee where he found major difficulties in determining the income

  ― 148 ―
actually attributable to the gift or by the Commissioner where he is not satisfied with the basis of determination of a lower figure put forward by the donee.

11.22. The view might be taken that, despite the difficulties outlined above, there should be a notional aggregation of the income, arising to a donee from capital transferred by way of gift, with the income of the donor for assessment of tax. This view could enlist greater support where the donor and donee are husband and wife, because such transfers commonly have saving of income tax as their objective and because in practice some married couples pool their incomes for joint spending. These aspects are considered in more detail in Chapter 10 dealing with the taxing of family units.

11.23. An alternative view is that where a gift of capital has been made by one person to another, including a gift between married couples, the Revenue should be satisfied by payment of any gift duty liability; and income arising from the gift, in the hands of the donee, should be taxed to the donee in the normal way. This view is supported on the grounds of the major difficulties, to both taxpayers and the Commissioner, in satisfactorily identifying, in the hands of the donee, the capital constituting the gift and the income flowing from it, referred to earlier in paragraph 11.19. These difficulties would increase with the passing of time subsequent to the making of the gift and the need to identify further income arising from the investment of earlier income produced by the capital the subject of the gift.

11.24. The Committee, on balance, favours the latter view and accordingly recommends that income derived by a donee from capital received as a gift should in all cases be assessed to income tax in the hands of the donee in the normal manner.