Abolition of Gift Duty

Posted: 21st October 2011

As you may be aware, gift duty is to be abolished with effect from 1 October 2011.  This is one of the most fundamental changes to take place since the abolition of estate duty in 1992.  It presents us with many opportunities to appropriately plan for succession and to better achieve your estate planning objectives.

The abolition of gift duty means that it will be possible for you to make a gift of any amount without gift duty liability.  Immediately after the abolition of duty, the most common situation will be where people make gifts to family trusts by way of forgiveness of debt owing to them.  In the future, it is more likely to involve an outright gift of assets into a trust.  In either case, this will be a sensible step for many people but we believe that it should be taken only in the context of an overall succession plan, and after due consideration of relevant factors.

The purpose of this article is to outline the issues that need to be taken into account in deciding whether or not to make a gift.  The decision as to whether or not you make a gift will depend upon your own circumstances.

The factors that need to be taken into account include the following:

If you gift almost everything you own to a trust, you need to consider the following:

(a)           If you forgive all the debt that is owed to you by the trustees of the trust, you will no longer be able to demand repayment of any of the debt.

(b)          You need to be sure that the trustees you have in place are appropriate for your circumstances as you will become dependent upon the exercise of trustee discretions to receive income or capital from the trust in the future.

(c)           You should check that the terms of the trust deed are in all respects appropriate for your circumstances and that you and your spouse or partner are beneficiaries if it is intended that in the future you and/or your spouse or partner will rely on the trust's income or capital.

(d)          If you forgive the whole or any part of the debt, you will need to still keep in mind the potential exposure to tax under the rules relating to financial arrangements in the Income Tax Act, if, subsequently, the trustees make a distribution to a beneficiary for whom you do not have "natural love and affection".

(e)          If a trust owns virtually all the assets that you previously owned, and you have specific wishes regarding their disposition to members of your family and others, then you will need to ensure that the intended recipients are beneficiaries of the trust and you have in place an up-to-date letter of wishes or memorandum for the guidance of the trustees.  Even so, you will need to accept (unless there is a specific provision in the trust instrument binding the trustees) that while such a letter or memorandum may be referred to by the trustees as part of their decision-making process it is not a legally binding document.

Remembering that there are certain laws that protect creditors, it will be important to make the gift at a time that you are solvent.  We believe it will be desirable to establish your solvency through a solvency certificate provided by your accountant or, as a minimum, a declaration of solvency made by you after due consideration of your financial situation.

You will need to consider whether any implications arise for you if, after having made the gift, you do not have many assets of your own.  Will this affect your ability to raise finance, obtain credit cards, etc?  In many cases, the trustees of the trust will be able to provide a guarantee but that is a matter for the trustees and not for you.  You will need to be satisfied that you are happy to take the risk that the trustees may not necessarily agree with your requests of this nature.

You should consider whether there are any contractual commitments or other promises that you have made that might not be fulfilled if you gift all your assets.  For example, you may have entered into an agreement under the Property (Relationships) Act with your spouse or partner under which you are obliged to provide a certain minimum level of compensation on separation, or support in the event of your death.  If you gift everything you own this obligation may not be fulfilled and could give rise to claims against you or your estate.

Similarly, if you gift everything you own your estate will not have any assets to pay or fulfil any specific legacies you may have left in your will.  You should, therefore, review your will and either determine to retain certain assets in your ownership, or ensure that the people you want to benefit are beneficiaries of the trust that receives the gift so that the appropriate level of benefit can be delivered to them.

You should also check to see if you have any contractual commitments that might prevent you from reducing your assets to a level below a certain minimum by gift or a transfer for inadequate consideration.

The gift of income earning assets may have tax consequences as most, if not all, of such assets are deemed to be disposed of at market value.  In addition, the gift of shares in a company may have an adverse effect on the ability of the company to carry forward losses or imputation credits, or the ability of the company to group with other companies for tax purposes.  The reduction of your assets that are at risk in relation to an investment through a look through company or a limited partnership may limit the amount of losses from such entities you are able to utilise against your income.  Specific tax advice should be obtained.

If you are a registered person for GST purposes, there may be GST consequences for you if you gift goods or services in the course of your taxable activity to an associated person.  In addition, if the subject matter of the gift is a going concern or land that will be utilised in a taxable activity, there may be some formalities to complete for the gift to qualify for zero-rating.

If you are intending to make gifts to reduce your assets so as to qualify for a residential care subsidy, you should bear in mind that the availability of the subsidy is subject to an asset test.  For the purpose of this test, gifts in excess of certain amounts are included as part of your assets.  In summary, only gifts of up to $6,000 per annum in the five years preceding the application for the subsidy will be regarded as gifts, and anything in excess of this amount will be added back into your assets.  Similarly, unless there are exceptional circumstances, only gifts up to $27,000 per year will count as gifts in the period that precedes the last five years before your application.  Therefore, a large lump sum gift in one year will mean that only $27,000 counts as a gift and the rest of the gift regarded as still your property for the purposes of the assessment.

As mentioned, while we believe that it will be sensible for many people to make gifts to their trusts and possibly to others, and there may be good reasons to do so, this step should only be taken after considering all relevant factors, including the ones outlined above.  Moreover, the decision to make a gift of all or a substantial part of your assets should only be made in the context of an overall succession plan.  Each case needs to be considered on its own merits before the decision is made.

If you have any queries regarding the above article, please contact Sudhir Lala on (09) 308 4055 or sudhir.lala@tbag.co.nz

Source: Taylor Grant Tesiram