Gift Duty Abolition

Background:

In November 2010 the Government announced its intention to repeal gift duty from 1 October 2011. The legislation confirming this change has recently been passed into law and the limitations on gift duty will no longer apply as from 1 October 2011.

The original purpose of gift duty was to protect the estate duty base from attack. As estate duty was repealed in 1992 the rationale to retain gift duty became weaker, however it was at that time decided that gift duty should be retained on a temporary basis until concerns over income tax avoidance and social assistance targeting could be properly addressed by changes in other legislation. These issues have subsequently been addressed by remedial legislation and gift duty was subsequently viewed by some as providing some protection (albeit limited) to creditors against a party disposing of their wealth.

The gift duty regime imposed restrictions on the amount that any person could gift in each year. Gifting of more than $27,000.00 in any year was subject to the imposition of gift duty. This meant that when assets were transferred to a trust the settlors were required to take a debt back from the trust and this debt was then reduced slowly over many years. For many clients this was a costly and time consuming process.

From the Inland Revenue perspective, it had become clear that gift duty revenue taken in was far outweighed by the cost of administering the regime. For that reason the Government has now abolished gift duty on a cost benefit basis.

Looking Forward:

It is imperative that anyone owed a debt by their trust should not assume, despite the law change, that in every case you should gift away the entire debt owing to you. Whether to do so, or not involves a great balancing act. On one hand, you may to need recourse to the assets in the trust at some time in the future, but on the other hand, you retain exposure to creditor protection, relationship property and succession claims in respect of the amount of the debt owed by the trust to you.

For some people it may only be appropriate to forgive part of the debt owed. It may be desirable that you have recourse to the assets of the trust without the need to rely on the goodwill or agreement of the trustees in the future by simply being able to demand repayment from the trust as and when you require funds.

This ability to access funds must be balanced against the asset protection that the trust owning the assets without any debt back to you may provide. That protection has always been undermined in part by the accessibility and challenge to the debt that remained outstanding. The debt owed has always been vulnerable to attack by creditors and the change to the law now provides the opportunity to forgive this debt in full immediately rather than gradually over time.

Pitfalls and Clawbacks:

There remain many implications involved in the disposition of your assets in one lump sum. Forgiving all the debt changes your financial position in a significant manner. For this reason, creditors are likely to scrutinise the disposition of any substantial asset by you much more closely than they may have in the past with the view that they may be able to clawback that disposition.

There are numerous clawback provisions operating under the law in New Zealand. Examples are: The Property Law Act 2007, the Insolvency Act 2006, The Companies Act 1993 and The Property (Relationships) Act 1976. Under each of those Acts there are provisions (albeit slightly different) that may be used to set aside the disposition of the asset and thus make those assets available to creditors or other claimants.

In essence therefore, anyone contemplating using the change in the Gift Duty Act to dispose of their assets in full after 1 October 2011 will need to take into account the additional steps that they must go to to ensure that such disposition is not open to challenge. There are many matters that will need to be appropriately considered.

Getting it Right:

Notwithstanding that the change in the Gift Duty Act will allow you to dispose of your assets in full (subject to completion of the appropriate documents) it is more than likely that the clawback provisions under the various Acts mentioned above will be used more frequently and relied upon by creditors, the Official Assignee and other claimants, and for that reason, careful consideration must be given before you dispose of assets in this manner or contemplate forgiving any debts owed by a trust to you.

You must also take into account that whenever you settle assets into a trust the requirement remains that such settlement must be made at "market value" to ensure that the there is no element of "under-value transfers". Valuations must still be used to establish and maintain the market value of assets transferred.

Administration of Trust:

One positive aspect of the annual "gifting round robin" was that it provided an opportunity for trustees to turn their minds to the factors surrounding the administration of the trust on a reasonably regular basis. This enabled the trustees to keep adequate and appropriate track of what was happening in respect of trust assets, ensure that advances were noted and recorded appropriately, and where there had been repayments and re-advancing of funds, that they had been documented properly.

Records and documentation are vital to ensuring that a trust survives careful scrutiny by any parties interested in perhaps busting the trust and obtaining access to the trust assets to satisfy debts. It remains vital that a trust is administered appropriately in accordance with the terms of the trust deed and the law. Failing this, the trust may be deemed a sham trust or an alter ego trust and as such be able to be busted and the funds extracted by creditors.

Summary:

Nothing is as straight forward as it might have seemed from the press releases and other articles published relating to the abolition of gift duty. You need to be satisfied that what is done now, and in the future, is the right course of action for both you and for your trust. For those who may not have considered the formation of a trust previously, this is also a good time to consider adopting and operating a trust for the protection of your assets.

If you want further information on any matters raised in this article please do not hesitate to contact us to arrange for an appointment to discuss matters.