Abolishment of Gift Duty
After a great deal of deliberation, the government voted to abolish gift duty. This abolition officially came into effect on 1 October 2011.
Gift duty has been around almost as long as Perpetual, over 126 years and originally designed to discourage people from gifting assets before death in an attempt to avoid estate duty. Since estate duty was zero rated in 1992 and subsequently abolished, whispers of an impending abolishment of gift duty followed for years. However, despite a 2001 recommendation from Inland Revenue to do so citing unfavourable cost of compliance to revenue return, it took another 9 years to be repealed.
The Taxation (Tax Administration and Remedial Matters) Act 2011 amended the definition of “gift” under the Estates and Gift Duties Act so the term referred only to disposition of property made before 1 October 2011.
What is Gifting?
When a trust is established, the trust doesn’t usually have enough money to buy assets from those who set it up, the ‘settlors’. The trust therefore enters into a Deed of Acknowledgement of Debt which allows assets (property, higher value personal contents and certain investments) to be transferred or “purchased” by a personal trust. In turn, the trust then owes a debt to the settlors. The debt is ‘forgiven’ by the settlors through ‘gifting’ which allows each settlor to ‘gift’ to the trust without incurring duty. More often than not it is gifted off over a period of time.
On 1 October 2011, Parliament passed legislation to remove gift duty which will enable the following benefits relating to trusts:
- The balance of any existing debts will be able to be forgiven instantly with no gift duty;
- It will allow for additional assets to be transferred to an existing trust with less formality and paperwork, again with no gift duty;
- New trusts can be established on more modern terms to allow for new assets to be sold to the trust with no debt back or gift duty implications.
How may gifting duty abolition affect your family trust?
Although on the surface, this seems like a boon and, indeed, gifting to a trust will now be more flexible, there are still complex issues which, if not handled properly, can result in negative consequences.
What remains for consideration is:
- Should your trust have a gifting programme?
- For what should that gifting programme be designed, e.g. which assets and how much to gift?
- Is your trust structure, including your gifting programme, done in accordance with regulations?
It is important to acknowledge that the abolition of gift duty will not mean that gifting is suitable for everyone. It’s also important to remember that the Government departments still have the legislation or the means in place to ensure that gifts that aren’t of a genuine nature will be captured.
How do I make sure my trust is structurally sound?
One of the knock on values of the gift duty is that it encouraged regular examination of which assets were put into a trust, why and who the assets would benefit. Without the legislative driver of a gifting programme, trusts will continue to be as much or more under the microscope than before to ensure that they are structured correctly. There are five primary areas of concern where professional advice is most valuable to ensure that your trust is optimised and you avoid issues with the IRD:
Income Tax Implications
While a key benefit of a trust may be tax mitigation, a trust, and by extension your gifting programme, shouldn’t be viewed as an opportunity for tax avoidance. An example of this is the recent case of the surgeons in Chch who have been charged with using their trust to dilute their income and thus decrease their taxable earnings and tax rate. Also, formal valuations of assets to be held in trust are still a requirement.
Settling of Assets into a Trust
The rules defining beneficiaries and forgiveness of debt are still in place. This means that, for example, if a financial arrangement e.g., income, from the trust is paid to beneficiaries who are not those for whom the creditor has “natural love and affection” and which are not charities, then this will raise a flag to the government which can, and likely will, “claw back” these gifts from beneficiaries deemed inappropriate.
The trust also shouldn’t be used to hide or protect assets in the case of a bankruptcy. Before the making of any gift, the solvency of the donor must be considered. Two pieces of legislation, the Property Law Act and the Insolvency Act, give creditors protection and includes the ability to “claw back” gifts in certain circumstances. This can also be used for ‘presumptive’ provisions whereby, for example, creditors can make claim to assets gifted to a trust within two years of bankruptcy.
Likewise, trusts shouldn’t be used to try to hide assets from a spouse or partner where they would normally be entitled to a share under the Property (Relationships) Act. An entitled spouse can still seek compensation in the case where the transfer of property was to defeat their interests.
Residential Care Subsidy
In order to achieve entitlement to residential care subsidy, the Social Security Act and Social Security Regulations Act have set out the rules by which WINZ can means test an applicant’s income and assets of the last 5 years to determine eligibility. If it’s found that the applicant directly or indirectly deprived themselves of any income or property, WINZ has the discretion to assess that person’s financial condition as if that deprivation had not occurred. Trusts have been used as a legitimate mechanism for asset management for means testing. Deprivation can be applied to any person who gifts more than $27k in a one year period. Means testing also looks beyond assets to income. Regulations for means testing as they apply to trusts are unchanged with the abolition of gift duty.
Our recommendation is to ask to have your trust reviewed to ensure that the structure, relative to your current situation and goals, is current and in line with the most recent legislative changes and legal challenges. A key part of this is to determine, if you have a gifting programme in place, whether it’s still suitable and if so, in what capacity.
If you would like to have one of our expert Trust Consultants review your trust you can click here to find one in your area.