Gift Duty was abolished as at 1st October 2011.
There are a number of important issues to consider with your accountant and lawyer, before deciding to gift the full debt owing from you to your Trust. Gifting all the debt in one lump sum may not be best for you.
Do you really want to gift the loan?
How good is your Trust?
- Has the Trust deed been reviewed lately?
- Is it flexible to new legislation & Trust changes?
- Has it been administered and managed well?
- Is the Trust meeting its original purpose?
Do you want to keep some assets outside of the Trust so that you still have full control of them?
- If you are not a Trustee you may choose to keep the loan, so that you have some control.
- Otherwise future funds available to you could be at the discretion of the Trustees.
- Be careful of relationship problems if your spouse is a trustee,
- If you have advanced funds to children or their trust – you may want to keep the loan in case your children have relationship property claims against them.
- Could your trust be subject to future claims against it? Examples could be IRD and creditors.
Can you gift?
In some cases you may not be able to make a gift.
- If you are gifting to prejudice creditors the gift could be reversed or overturned.
- If you are not solvent at the time of the gift, then the gift could be reversed or overturned.
- Does the person gifting have significant personal guarantees that could impact on their solvency?
- Are there contingent liabilities that may arise for the donor?
- Gifts within 2 years of bankruptcy may be set aside.
Tax and Legal problems with gifting?
In the past gifts have only been $27,000 per year, therefore they have been a very small target for IRD and other creditors. If you plan to make a large gift IRD and other creditors may become a lot more interested!
- If you do not have natural love and affection for the creditors to whom you are gifting, then the gift will be taxable to the recipient. Watch gifts to companies!
- Be careful having Companies as beneficiaries of Trusts. If a trust has distributed to a company in the past, any gift the Trust received will be taxable.
- If the loan has been used for a taxable purposes, with an associated interest deduction. If the loan is gifted the tax deduction may be lost.
Tax Avoidance?
- If you have previously allocated income to a beneficiary to make use of the lower marginal tax rates, then it could be used as tax avoidance if these amounts are later gifted.
- If a gift could convert to the donor or their relative within 7 years, then in the past IRD have declared their arrangement as tax avoidance.
- Be very careful if trusts have less than 7 years to run.
Overseas Beneficiaries?
Many NZ Trusts have beneficiaries that live overseas.
- Most overseas countries (Such as Australia) will tax prior year income and capital gains if tax resident received a gift. The prior year income and capital gains could amount to a significant amount!
- It may be best to keep the money personally, then gift from individual to overseas children.
Rest Home Care Subsidies?
- Any gifts within 5 years over $6,000 per year will be excluded and the extra amount included in the persons assets.
- Any gifts (ever) over $27,000 per year before the 5 years, will be excluded and the extra amount included in the person assets.
Therefore Gift Duty has been abolished but the Rest Home rules have not changed and a gift over $27,000 could impact on your right to receive the subsidy.
Summary
Seek legal and tax advice before gifting as there may be valid reasons not to gift.