Gifting your assets is set to become easier with gift duty due to be abolished on 1 of October 2011. At present, gift duty is imposed on all gifts with a total value exceeding $27,000 in any 12 month period. The abolishment of gift duty will allow individuals to make gifts of any value in any one year without attracting gift duty and therefore not requiring the use of gifting programmes.
Background
Gift duty was established in 1885 with the purpose of protecting the estate duty base (through discouraging individuals from gifting away their assets prior to death) and to raise revenue. Estate duty was abolished in 1992, however, gift duty was preserved to guard against people taking advantage of social assistance regimes and provide protection to creditors.
Reasons for Abolishment
The abolishment has received broad approval from a range of government agencies including the Inland Revenue Department (IRD), New Zealand Treasury and the Ministry of Social Development. The key motivations for the abolishment stem from a review by the IRD highlighting that gift duty generated exceedingly high compliance costs of $70 million compared to the meagre revenue generated ($1.6 million in the 2009/2010 year). It was also noted that gift duty was easily avoided through the use of gifting programmes and therefore no longer remained an effective tool. It also follows a large number of requests for thresholds to be raised and for the modernisation of administration processes.
Concerns and Cures
There are concerns that the abolishment of gift duty will see a significant rise in the creation of trusts and an increase in the number of transfers of assets into trusts. Concerns over 'social assistance targeting' relate to individuals deliberately impoverishing themselves to avoid assets being included in their assessment for social assistance, relationship property or to escape creditor liability. However the IRD, in its agency disclosure statement, deemed these risks as low and have suggested policy changes to counter any abuse of trusts - such as the Ministry of Social Development taking into account any asset transfers within the past five years of an applicant applying for social assistance. The family courts are also more closely scrutinising trusts with regard to relationship property matters, and claimants access to those assets.
Concerns that the repeal will affect creditor protection in the event of a debtor going bankrupt has been deemed insignificant as other means of protection are readily available through the Insolvency Act, Companies Act and Property Law Act.
The establishment of a Trust Register, and requiring trustees to file annual financial statements, have also been recommended to the Law Commission for review as a means of monitoring and regulating trusts in New Zealand.
Conclusion
Despite concerns regarding the abuse of trusts, the IRD deems the risks entailed with the abolishment of gift duty as arguably insignificant and heavily outweighed by the monetary benefits generated. It predicts that with the co-operation from affected agencies and implementation of the recommendations from the recent review of NZ Trust Law, any loop-holes will quickly be sealed.
For more information on this subject, please visit the IRD website.
For further prespective, please refer to law clerk Rachale Mortiaux's article here.
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