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Farm Succession Made Easier - The Repeal Of Gift Duty

08 November 2010

As from 1 October 2011 it should be much easier to transfer assets to family members and trusts. The government has confirmed that it will definitely repeal gift duty and the law is expected to be introduced into Parliament this month. The implications are significant:

  1. Farmers will be able to put in place succession plans much more easily.
  2. Farmers will be able to transfer farms (and other assets) much more easily to trusts and therefore protect those assets from future claims - for example, potential relationship
    property claims and claims by potential creditors.
  3. Gifting programmes will no longer be necessary. (This is explained in more detail below.)

 

What is Gift Duty?

Gift duty is a tax on gifts which exceed $27,000 made by anyone in any 12 month period.

 

Why Tax Gifts?

Gift duty was originally introduced to prevent people avoiding payment of estate duty. Without having to pay gift duty, people could simply gift away their assets prior to death.

 

What is Estate Duty?

Estate duty is a tax payable on an individual's death where his or her assets exceeded a certain value. Estate duty was abolished in New Zealand 1992.

 

How to Avoid Payment of Gift Duty

At present payment of gift duty can easily be avoided. This is done as follows:

The asset is sold to a family trust or family member at its market value. The price remains owing as a debt, repayable interest free and upon demand.The debt owing by the family member or trust is progressively forgiven at the rate of $27,000 per year. This is called a gifting programme.

 

Present Situation

Until all the debt has been completely gifted away, it is an asset of the person undertaking the gifting programme. In the case of a farmer who has transferred his or her farm to a trust, this debt may be taken into account:

  1. by the government - when assessing the farmer's eligibility for government means tested benefits.
  2. by creditors – who may be pursuing the farmer for repayment of a debt.
  3. by spouses and partners – where the farmer's relationship ends. (This can be either on separation or death of the farmer).
  4. by children and other family members – where the farmer leaves them out of his or her Will, or provides unequally for them under his or her Will..

 

Reasons for Keeping Gift Duty

When estate duty was abolished in 1992 the main reason for gift duty no longer existed. However, gift duty was retained, mainly for two reasons:

  1. To prevent people gifting away income producing assets so that they avoided payment of income tax; and
  2. To prevent people gifting away assets so that they could qualify for government social assistance.

Since the abolition of estate duty in 1992, gift duty has also been seen to provide some protection for creditors. If people can easily gift away their assets, those assets are no longer available to pay their debts.

 

IRD's Position

The IRD has recently released a statement recommending that gift duty be repealed. The IRD has noted that gift duty provides very little revenue for the government, but the estimated compliance cost to the private sector is $70m. This cost is mainly for the gifting programmes being undertaken.

In its statement, the IRD also points out that the income tax concern is less relevant because personal and trust income tax rates are now aligned, creditors are given protection under other laws and that the integrity of government social assistance can be addressed in other ways.

 

Once Gift Duty is Repealed...

The farm or asset can be transferred to a family member or trust in one go. There will be no need to complete a gifting programme to get rid of the debt. There will be no debt owing which can be taken into account in the situations listed above.

As noted above, there will still be ways the government, creditors and spouses can pursue assets that have been transferred. However, for transfers of assets of significant value, for example a farm worth $3m, the ability to transfer the asset in one hit and without having to gift off its value, will have definite advantages.

 

There's a Sting in the Tail

The Law Commission is currently undertaking a review of trust law. It is likely that the result of that review will be new forms of regulation, such as the establishment of a central trust register and the compulsory filing of annual trust accounts. Watch this space!

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.