The New Zealand government may have been viewed by some as Santa heralding Christmas early when it announced in November 2010 that the 125 year old gift duty will be abolished effective 1 October 2011. But what does it mean for the small business owner? Does it really herald a better opportunity to shield family assets from potential business risks?
The driving factor for the government has been to remove a tax which is cumbersome and expensive to administer but reaps little revenue. The full implications for trusts in New Zealand – both benefits and burdens – may take some time to surface.
The current gift duty regime imposes cumbersome restrictions on a person’s ability to transfer significant assets to a trust. Assets must be transferred to a trust at current market value and an individual gifting more that $27,000 per year to a trust will be taxed. Therefore, most New Zealanders make gifts to trusts through a structured gifting regime; slowly reducing the debt the trust owes them by making an annual gift of $27,000. The ungifted debt remains part of that individual’s personal assets and is exposed to creditor claims.
With the abolition of gift duty it will be possible to simply give assets to a trust and in the case of an existing gifting programme, to ‘gift-off’ the balance of the remaining debt owed by the trust. So, now that a New Zealander does not have to contend with a gifting programme that stretches out over several years or decades, real asset protection may be achieved with greater ease and efficiency.
Gifts in this post-abolition era are inevitably going to be large. For this reason, it is critical that the gift is carefully planned and advised on by professionals.
A gift can be clawed back if it defeats the claims of creditors who were owed funds at the time of the gift. Also, if the gift defeats claims under a guarantee existing at the time of the gift, the gift can be undone.
Under the current law, if a person is declared bankrupt the Official Assignee can set aside any gifts made in the previous two years and in some circumstances up to five years before.
The person making the gift also needs to carefully consider whether he or she is comfortable with not personally owning the assets, but having them held by a trust of which he or she will be one among a number of beneficiaries. When you personally own an asset you can do with it as you please. When an asset is owned by a trust it must be used and managed for the benefit of the beneficiaries.
While the abolition of gift duty is generally regarded as a positive (and overdue) step, a cautionary note needs to be sounded. The change may mean that the New Zealand courts become more willing to scrutinise a trust and its authenticity. The New Zealand Law Commission is presently reviewing trust law and among a number of issues it is investigating the operation of trusts to defeat creditor claims.
It may be some time before the law in this area is clarified. What we can say is that it becomes more important for a trust to be well managed with regular trustee meetings and proper record of all trustee decisions. With the abolition of gift duty there is a risk that, in the interest of minimising administrative costs, trustees ignore annual review of the trust which, up to now, has conveniently coincided with the annual gifting programme.
For small business owners a trust can be a key tool in managing and protecting family assets from the risks of business. The gift duty changes allow greater use of trusts. This means the use of skilled legal advisors in structuring your affairs becomes even more important.