The abolition of gift duty and how it effects you

12 December, 2011 | Peter Smith

As you may be aware, on the 1st of October 2011 the Government abolished gift duty for which the consideration was natural love and affection. The repeal of gift duty extends to all gifting not just “natural persons” gifting associated with family trusts.  It also applies to all gifts including company gifts and charitable entity gifts.

The abolition of gift duty impacts on all gifting programmes in that:
Gift statements are no longer required to be filed with the Inland Revenue Department from 1 October 2011, however Deeds of Forgiveness of Debt (or Deeds of Gift) are still required to complete existing gifting programmes.  Although it is not a requirement that any new gifting be recorded in a Deed of Gift, we recommended that this still take place.  You may be required to complete a “solvency statement” at the time a Deed of Gift (or if no deed is prepared gifting) takes place.

Should you sell a property to a related party for nil or little consideration then effectively no valuation is required, however it would be best practice to obtain a valuation so that there is something that determines the value of the asset being transferred and therefore the value of the gift.

In respect of family trusts, if the settlor is transferring the family home to the family trust for no consideration, then an agreement for sale and purchase is not required as the authority and instruction form recording the transfer is sufficient.  As discussed earlier, a deed of gift is still prudent.

If you have in the 12 months preceding 1 October 2011 already made an annual gift of $27,000.00 this will not impact on you being able to make a final “super gift” post 1 October 2011.

Income Tax Implications

Gift duty is ineffective in preventing income splitting where assets have been sold to a trust.

Given the alignment of tax rates there is now reduced benefit in having income split through trusts.

The Inland Revenue Department will continue to rely on general anti avoidance provisions where they feel income splitting crosses the line.

Gifts made to persons other than for whom the “natural love and affection” rules apply will be taxable in the hands of the donee.

Implications for Creditor Protection

The provisions of the Insolvency Act 2006 and the Property Law Act 2007 are still applicable and have not been amended. You should be aware of claw-back provisions in respect of this legislation in particular whether (in the case of companies) the company could have been deemed to be insolvent at the time it made the gift and in the case of individuals whether there were gifts made within two years (or in some cases five years) of bankruptcy.

Any intent to defraud, prejudice or defeat creditors could result in gifts made being “clawed back”.

Implications for Relationship Property

As a result of the abolition of gift duty and the expectation that people will now complete “super gifts”, it is easier for people to put relationship property beyond the reach of a spouse or partner and it is more likely that spouses/partners will make use of “Trust busting” provisions.

Any dispositions made in order to defeat the claim or rights of any person under the Property (Relationships) Act 1976 could result in compensation for any spouse or partner whose rights have been defeated and the Courts are able to vary the terms of any Trust to avoid this.

The Courts are also empowered to vary the terms of any pre and post nuptial agreements including settlements that have been made on any Trusts under the Family Proceedings Act 1980.

Implications for Family Protection and Testamentary Promises Claims

As property gifted ceases to be part of the donor’s estate, a property that has been gifted is not able to be subject to Family Protection claims nor testamentary promises claims and claimants can only bring an action against the Donor’s estate not the Trust created by the Donor.

Implications for Residential Care Subsidy

It is important to note that the Residential Care Subsidy asset thresholds have not been changed and currently any gifts made in excess of $6,000.00 per annum for the preceding five years and any gifts in excess of $27,000.00 at any time prior to that  are able to be brought back in, in terms of calculating the current assets of the person applying for the Residential Care Subsidy.  This includes gifts made by the person’s partner.

A failure to charge or demand interest by a person or their partner is treated as deprivation of income.

The Ministry of Social Development will be more vigilant in determining whether deprivation has occurred where a person has an interest in a trust.

Conclusion
You should discuss the advantages and disadvantages of establishing a Trust and carrying out gifting with your legal adviser to ensure that there are no adverse tax, solvency, property relationship or residential care subsidy implications for you.

If you have any questions regarding the above, or wish to seek advice regarding gifting and family trusts, please contact Trust Law expert, Peter Smith by phone on 09 837 6882 or email peter.smith@smithpartners.co.nz