The Abolition Of Gift Duty And Its Implications

15 December 2014

The current law imposes restrictions on the amount that people can gift. A gifting of more than $27,000 per person per year will be subject to gift duty. The implication of this law, in terms of trust administration, is that most New Zealander's would transfer assets from their personal name to their Trust, record the debt owed to them personally by the trust and then set up a gifting programme which would reduce the amount the trust owes them personally at an amount of $27,000.00 per person per annum. For clients, this was often a costly and time consuming process. From the perspective of the Inland Revenue Department, who is responsible for the collection of gift duty, the time had come where any gift duty revenue gained was outweighed by the cost of administering the collection system. For these reasons, the Government has proposed to abolish gift duty in New Zealand.

From 1 October 2011, it is anticipated that assets will be able to be gifted into the trust in one transaction without the need to worry about gift duty. This means that existing debts owed by the trust to clients personally can be forgiven in full with one set of documents. It will also mean that clients will be able to transfer assets into a Trust and then forgive the entire value of the asset transferred without the need for a gifting programme. It will also be possible for clients to gift sums to those for whom they have natural love and affection without reference to the threshold of $27,000.00 per person per year.

Clients do need to bear in mind however that irrespective of the law change, there will still be the need for the usual documentation to establish the debt (being the Deed of Acknowledgment of Debt) and then to forgive the debt (via the Deed of Gift). The difference under the proposed new law is that this forgiveness may be for the full amount of the debt, rather than $27,000.00 per person.

It should not be assumed from the law change that in every case a client should gift away the entire debt owing to him or her. Whether to gift or not involves balancing the need, on one hand, to have recourse by right to the assets in the trust against, on the other hand, the exposure to creditor protection, relationship property and succession claims. For some clients, it may only be appropriate to forgive a portion of the debt owed. Clients may feel that it is desirable to have recourse to the assets of the trust without the need to rely on the goodwill or agreement of the trustees by simply being able to demand repayment from the Trust as and when required. On the other hand, asset protection via a trust has always been somewhat undermined by the debt that remained outstanding to the person who transferred the assets to the Trust. This debt back could be vulnerable to attack by creditors and the proposed new law does provide the opportunity to forgive this debt in full immediately, rather than gradually over time.

In terms of the implications of the abolition of gift duty to creditors, it must be remembered that under the proposed new law, the financial position of those who have transferred assets to the trust can change immediately by the gifting of the full amount of the debt owed contemporaneously with the transfer of the assets to the Trust. For this reason, creditors are likely to be scrutinizing the disposition of this substantial asset very closely in the hope of clawing back that disposition.

Under the Property Law Act 2007, there are provisions relating to the setting aside of dispositions that prejudice creditors. These provisions apply to dispositions with intent to prejudice a creditor (rather than intent to defraud creditors under the previous provisions of the Act) or by way of gift where reasonably equivalent value in exchange is not received. Therefore, under these provisions, gifts at under value, irrespective of intention, are vulnerable to be set aside. These provisions may prove fruitful for creditors as there is no time limit on when gifts can be clawed back.

There are also claw back provisions under the Insolvency Act 2006 relating to voidable gifts. If a bankrupt made a gift within 2 years of bankruptcy, the Official Assignee may, at their discretion, cancel such gift. Insolvency (that is, the inability to meet ones debts as they fall due) in such circumstances is presumed and unable to be rebutted by the bankrupt. If a bankrupt made a gift within 2 to 5 years of adjudication and the bankrupt was unable to pay their debts, the gift may also be cancelled. Again insolvency of the bankrupt is presumed but can be rebutted in this case if it can be proved that immediately after making the gift or at any time after that up to adjudication, they were able to pay their debts without the aid of the property gifted. One possible way to minimize the risk of these claw-back provisions is for people who intend to dispose of assets is to complete a form of solvency certificate which will firstly, establish that they have turned their mind to whether, in their current financial position, it is sensible to dispose of assets and secondly, will record the fact of their solvency, which may be useful evidence in the future if such an attack is made.

In summary, these provisions are likely to be more frequently relied upon by creditors and the Official Assignee and for that reason, careful consideration needs to be made by clients contemplating forgiveness of debts owed to them.

Clients must also bear in mind that the settling of assets onto a trust will still need to be made at market value to ensure that there is no element of under-value transfers. Valuations can be used to establish the market value of assets.

Traditionally, the annual gifting programme has provided an opportunity for clients to turn their mind to the administration of their trust on a fairly regular basis. With the new proposed new rules, the need for vigilance in keeping track of assets settled upon the trust and noting of advances or debts that have been advanced or repaid will be of upmost importance. Records and documentation may become the subject of careful scrutiny by interested parties and trustees will need to ensure that the records they have will hold up to such scrutiny.

Norris Ward McKinnon has a dedicated asset and estate planning team who are able to advise you on the right course of action for you and your trust. For those who have considered the formation of a trust previously, this is also an exciting time to reconsider the protection of your assets through a trust.

If you wish to discuss the matters raised in this article, please do not hesitate to contact us to arrange an appointment time with one of our experienced Trusts & Estates Team members.