As from 1 October 2011, gift duty has been abolished. Does that mean that donors can now make gifts without any issues arising?

The answer is no. The abolition of gift duty has only made the gift more flexible, but certain issues can still arise, resulting in adverse consequences for the donor.

The main issues are as follows:

1)      Residential Care subsidy –allows gifts of up to $6,000 p/annum in the 5 years prior to application and up to $27,000 p/annum in the earlier years. The dollar amount of assets held in your own name is also important.

This means that you can’t gift everything away to a Trust and then expect to rely on state assistance, because you don’t own any assets. If you gift everything at once, you may not meet the restrictions set by the different government departments.  Each department has different sets of rules.

2)      Creditor and insolvency protection – The Insolvency Act states that the Official Assignee can cancel a gift if that gift was made within 2 years of bankruptcy. Gifts made within 2 to 5 years of bankruptcy, where the person was unable to pay his/her due debts, can also be cancelled.

3)      Relationship property - With the abolition of gift duty, it will become easier for a person to transfer property into a Trust to defeat the interests of their spouse. A spouse may be entitled to compensation under the Property (Relationships) Act 1976, where their claim has been defeated by the disposition of property.

4)    Financial Arrangements rules – Some distributions may be treated as income for tax purposes at a later date depending on the intent of the distribution – especially if everything has been gifted.

We would recommend that a debt be left outstanding, to retain some control over the asset and to allow you to access funds on demand without tax implications.

Proper documentation should also still be kept to record the nature of the gifts made, even though these statements will no longer be required to be filed.

Market Salaries – Penny & Hooper v IRD: The Supreme Court has reached a decision on the Penny & Hooper case* and provides a useful warning with regard to using a trust (or any other structure, such as a company) to reduce your income and in turn reduce your tax liability.              

The case involved two surgeons who ran their business through a company and who were paid below-market salaries by the company. The company was owned by a family trust, so that the majority of the business profits would go through the Trust and to other family members at a lower tax rate.                                                                      

The Supreme Court ruled that this arrangement was primarily set up to divert income away from the surgeons in order to reduce their tax. This arrangement was caught by the anti-avoidance rules in the Income Tax Act 2007. The surgeons lost and also had to pay $25,000 towards the IRD’s costs.

This ruling has to be taken into consideration when setting shareholder salaries in future.

If you have any questions or concerns regarding these matters, please give us a call on 03-477 8777 to discuss it.

*Penny & Hooper v Commissioner of Inland Revenue [2011] NZSC 95