Article: Law & Finance
A Trap For People Gifting To A Family Trust with Ian Reeves
Gift duty to be abolished
1 October
The government intends to abolish gift duty. This is a welcome reduction of our tax regime. The legislation still has to be passed though. At the earliest it will be effective from 1 October, 2011. Legislation is often delayed, so it will be necessary to check when it becomes effective, before assuming gift duty no longer applies.
At present if you gift more than $27,000 per annum you will have to pay gift duty on the amount above $27,000. In the future this will not be the case. After the abolition of gift duty, the gift can be any amount. You will be able to gift a million dollars and not pay any gift tax to the government.
Assuming gift duty is abolished on 1 October, there are some things still to remember.
1. Gifting Still Has To Be Done
For people with family trusts, a deed of gift will still need to be completed to finalise the gifting. If you want to clear up your gifting to your trust, then you should instruct the person who is doing it, to do so. But be careful! Gifting everything at once may prevent you obtaining a rest home subsidy in the future.
2. Gifting Will Still Affect Rest Home Subsidies
Although the tax legislation will allow you to gift as much as you like, the government will still take the amount you gift into consideration when the application is made for a rest home subsidy. It does at present, and it will in the future.
Over the past decade the government has been more selective about who can receive a rest home subsidy. It applies restrictions for those who have made recent gifts. Winz, which administers the government policy, has increasingly enquired into the past gifting history to family trusts. That will still be the case. In theory, Winz can look back indefinitely into your gifting history. If it considers you have taken steps to divest yourself of your assets to obtain a rest home subsidy, it can refuse to grant you a subsidy, even though you would otherwise qualify. It is a safe bet that, with our population ageing, the test to obtain a rest home subsidy will become harder and more carefully policed in future. Your intention in doing the gifting may be a relevant factor.
My understanding is that Winz will tolerate gifting of a family home into a trust. However, that may change with successive governments. Also, if there is gifting of other assets, Winz will be more inclined to treat the gifting as an intentional reduction of assets to obtain a rest home subsidy, and may decline to grant a subsidy when applied for.
The position becomes more dangerous if the gift is a large amount. So gifting off $1 million in one hit, while it may seem sensible, may prevent getting a rest home subsidy in 30 years time.
The accountants and lawyers tend to have different views on what should be done about completing a gifting program to a trust. The accountants on one hand seem to be generally recommending that this gifting opportunity should be taken and debts cleared from the trust’s accounts as soon as gift duty is abolished. Lawyers however, including me, suggest caution if there is any wish to obtain a rest home subsidy in the future. A continued and measured gifting program may be wiser.
3. Family Trusts Have Other Purposes
Many trusts are set up for other valid reasons e.g. relationship property issues; protection of assets from creditors for people going into business; movement of assets to a trust to exclude a family member from benefiting from an estate on death, etc. For these purposes, a swift gifting of all debts will be greatly beneficial, even though there may be a negative result if a rest home subsidy is sought in the future. It is a balance to be considered, and a decision to be made.
4. Income Tax Can Still Apply
A further thing to remember is that, if the gift is made to someone with whom you do not have “natural love and affection”, the recipient of the gift will need to disclose the gift for income tax purposes - nothing to do with the gift duty tax which is being abolished. Income tax is not generally payable on gifts to family trusts as the trusts will have been designed to include only people for whom there is natural love and affection, so no income tax will be payable by the trust. But gifts to other people or companies, will be treated as income for tax purposes.
Conclusion
The abolition of gift duty, although greatly welcome, still leaves matters to be considered, before blindly taking advantage of the opportunity to gift the balance owed by the family trust.
Ian Reeves LLB has been a partner of Henderson Reeves Connell Rishworth, for 27 years. His law experience extends over 40 years of practice in New Zealand, England and Australia. Ian leads the property team at Henderson Reeves and has broad experience in commercial and business law, with a special interest in farming and trusts. He has been a presenter at an Auckland District Law Society trust seminar. He also acts as a consultant to the litigation and environmental law teams.
