March 24 2014
From 1 October 2011
The government has announced it will abolish gift duty from 1 October 2011 citing the cost of gift duty compliance (estimated to be $70 million pa) significantly outweighs government revenue ($1.6 million in 2009-2010).
Gift duty was intended to stop people giving away property before they died to avoid paying estate duty. Although estate duty was removed in New Zealand in 1992, the government retained gift duty. The disappearance of gift duty will affect nearly every person in New Zealand who has a trust. Gift duty is currently payable for gifts more than $27,000 in any 12 month period.
Currently where a trust does not have the funds to purchase an asset outright, the trustees provide the vendor with an acknowledgement of debt as consideration for the transfer of the assets. The vendor forgives $27,000 per year until the debt has been extinguished. Depending on the value of the assets transferred to the trust, the gifting programme could have taken years to complete. With the abolition of gift duty, gifting programmes will be a thing of the past,making the trust administration easier.
Transferring assets to a trust post-1 October 2011
After 1 October 2011, those with existing trusts can complete a deed of gift, completely forgiving the remaining balance of the debt owed to them by the trust.
For those who are contemplating the transfer of assets to a trust, there will be no requirement for consideration, and therefore no debt back to the vendor will be needed and assets will not need to be valued prior to the transfer. Deeds of gift and trustee resolutions should still be completed for an accurate recording of transactions. There can also be tax implications, so we recommend professional advice.
It is worth considering there may be good reasons not to forgive a debt. For example, the trustees may want to distribute capital to a beneficiary and debt repayment may be a good way to do this.
Implications of abolishing gift duty
People may be able to avoid potential claims under the Family Protection Act 1955 by giving assets to a trust while alive. This will leave nothing in the estate to claim against and in particular there will be no debt back from the trust (which up until now has been treated as an estate asset).
Relationship property claims could be defeated by one person in the relationship transferring their assets to a trustor company. Up until now the debt back to the vendor was a potential asset for a relationship property claim. After 1 October 2011 that may no longer be so in many cases - read more on the implications of relationship property in ‘Rush to Trust – or Maybe Not?’.
If a person has debts, particularly business liabilities, and transfers all his or her assets to a trust and then fails to meet obligations to creditors, the transfer could be set aside under the Insolvency Act 2006. The test is whether the person who transfers the assets is unable to pay all their debts as they fall due from assets other than those disposed of. This has been described as a cash-flow test rather than balance sheet insolvency. One commentator has suggested that clients should complete a list of assets and liabilities at the time of transferring assets to a trust to negate subsequent suggestions of insolvency.
The timing of the transfer will be an important factor. If assets are transferred to a trust well before problems arise,the risk of having the transaction set aside will be reduced.
The abolition of gift duty will make it quicker and simpler to transfer assets to trusts and the reasons for doing so remain as valid as ever. However we cannot emphasise enough the importance of talking with us before 30 September so we can give you the best advice for your particular circumstances.