Latest News [index] Abolition of gift duty â" what next?
If the Taxation (Tax Administration and Remedial Matters) Bill is enacted in its current form, gift duty will be abolished in respect of gifts made on or after 1 October 2011.
Gift duty and gift statement obligations will still apply to gifts made prior to 1 October 2011.
While many people will forgive all outstanding debts as soon as possible it is important to appreciate that:
1. this is not always in a person's best interest; and
2. where creditor issues arise later - proof of the gift and of solvency will be necessary.
Should you gift?
While recommending that someone does not gift may seem surprising, there are circumstances where it may not be appropriate to gift or to continue an existing gifting program.
A debt back can provide security for a person who has sold all his or her assets to a trust. This security can mean that the person is able to effectively preserve a right to live in trust property or ensure that capital will be repaid to the person if required.
Also there are some circumstances where an entitlement to a rest home subsidy will be lost through gifting. Consider for example a person with a partner in care, or no partner. Under the current level of assets permitted by the Ministry of Social Development ("MSD") a person can retain $200,000 or $105,000 and a house and a car. Accordingly, using this example, a person might prefer to retain the house rather than gift it as gifts made in the preceding five years will be treated as deprivation of assets and added back to the person's estate for purposes of assessing entitlement to a rest home subsidy. Using the house example, where that is gifted, the five year count back will put the person over the $200,000 threshold that applies where there is no house and so in this instance a person who would otherwise be entitled to a rest home subsidy will no longer qualify.
These are just two illustrations of the need for case by case analysis and the value add that some pre-gifting advice can achieve.
How to gift
A gift is effective if a person intends to make the gift and the recipient takes the gift.
Although there is no legal requirement that gifts (other than property) are recorded in writing - in the absence of any formal record of a gift, proving that a gift has been made may be difficult. Where a gift cannot be proven, it may be treated as a loan or an advance or as an incomplete gift such that the "gift" is still the person's property and is available to creditors.
It is also important to appreciate that not all gifts are welcome and there will be circumstances where trustees wish to disclaim a gift eg a gift of land subject to substantial rate arrears or subject to a hazardous substances notice, particularly as trustees are personally liable for such matters.
Solvency
In a post gift duty era, proof of solvency at the time a gift is made will be critical. In this regard it is helpful to remember that as there are count back tests for solvency, it may be appropriate to make gifts as early as possible, sometimes on multiple occasions during the year as each gift recorded provides a "marker" in relation to claw back provisions.
In addition to the provisions available to the MSD discussed above other specific claw back provisions include:
1. The Insolvency Act provides that gifts made in the past two years prior to an adjudication of bankruptcy with a rebuttable presumption that the person was insolvent for those 2 years: Insolvency Act 2006, part 3, sub-part 7
2. gifts made up to 5 years prior to bankruptcy can also be set aside if the bankrupt was insolvent at the time of the gift with the liability to prove solvency resting on the recipient of the gift: Insolvency Act 2006, s 204
3. dispositions to defeat creditors can also be set aside at any time: Property Law Act 1952 , Property Law Act 2007.
Contemporaneous evidence of proof of solvency would make it very difficult for the Official Assignee to argue insolvency under the Insolvency Act. For this reason it is recommended that a "solvency certificate" is completed before any gift is accepted by a trustee. The reason for this is that in the event of a challenge it is the trustee's obligation to prove that the person was solvent at the time of the gift.
While a solvency certificate may not be a total defence to a claim under either Property Law Act, it could be helpful. Also useful would be communications showing that any creditors had been put on notice as to any proposed disposition. See Regal Castings Ltd v Lightbody [2008] NZSC 87.
If you have any questions about gifting and the abolition of gift duty please contact a member of the Ayres Legal team.