Integration of Gift Duty with Estate Duty
24.17. An estate duty must fall short of its objectives unless the tax base is extended to include gifts made by a deceased person during his lifetime. The present Commonwealth estate duty aggregates with the estate gifts made within three years of death. Any gift duty incurred on such gifts is credited against estate duty and will have diminished the estate for estate duty purposes. Gifts made outside the three-year period are in general subject only to gift duty. No tax is payable if a donor makes a gift and the value of the gift (when aggregated with the value of all other gifts he has made in the preceding 18 months and will make in the following 18 months) does not exceed $10,000. Thus, if a donor makes one gift of $10,000 after the end of each successive period of 18 months and no other gifts in between, he can dispose of assets to the value of $120,000 in a period of little more than 18 years, without incurring any liability for gift duty. Even if the gifts are larger and duty is payable, the amount of duty is modest compared with the saving in estate duty that usually results when a deceased survives a gift by three years.
24.18. A further shortcoming of the present Commonwealth gift duty is that many transfers that are, in substance, gifts but are cast in a form falling outside the ambit of the existing tax base manage to escape duty. A simple example is the interest-free loan, repayable at call, made by a husband to a member of his family. In substance, there is a gift of the income forgone by the lender; yet no gift tax is attracted. Partnerships, companies and trusts are commonly used by taxpayers to divert income from themselves to wives and children in circumstances that do not attract duty, even though a gift of the relevant income is in effect being made. Transactions involving companies are used to diminish the property of a donor and increase the property of a donee, again in circumstances attracting no gift duty. Allowing another to use property without any payment for its use does not attract gift duty. Valuable rights such as an option may be allowed to lapse without attracting gift duty.
24.19. In paragraph 24.12 it was stated that the objective of ensuring that wealth is taxed once a generation requires that property subject to a life estate or a discretionary trust should be taxed on the death of the life tenant or of a beneficiary under a discretionary trust. If provisions including such property in the estate duty base are not to be defeated by the assignment or surrender of the life estate or interest during the lifetime of the life tenant or beneficiary, the assignment or surrender must be made to generate a liability to gift duty.
24.20. The Committee proposes a full integration of estate duty and gift duty which will have the effect of treating
gifts virtually in all respects in the same way as bequests. There will be only one rate structure. Gifts over life
will attract increasing rates
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of duty set by the rate structure, the rate of tax on any gift being
determined by the amount of the gift and the value of gifts already made. The rate of tax on bequests will be
determined by the amount of bequests and the value of all gifts made during life. Thus an estate will attract the same
tax whether it is given away wholly during life, partly during life and partly on death, or wholly on death.
24.21. An effect of the proposed integration will be to take away the incentive offered by the present law to make gifts during life. There seems no compelling reason why gifts during life should be treated more generously than bequests. In other words, gift duty should fully support the estate duty. The testator ought not to be encouraged by tax considerations, or be persuaded by his heirs with tax considerations in mind, to give up the security of wealth during his lifetime.